The RBA has just released its decision to leave rates on hold for another month at 2.5%.
But in the accompanying Governor’s statement it is clear the RBA is worried about the outlook for growth given the consumer uncertainty and a high Aussie dollar.
Last month on consumption, confidence and business they said:
Recent information suggests moderate growth is occurring in consumer demand and foreshadows a strong expansion in housing construction. Some indicators of business conditions and confidence have improved from a year ago and exports are rising.
This month they have been much less certain in their language around this area of the economy and highlight that it was net exports which drove growth in Q1. The RBA said:
In Australia, recent data indicate somewhat firmer growth around the turn of the year, but this resulted mainly from very strong increases in resource exports as new capacity came on stream; smaller increases in such exports are likely in coming quarters. Moderate growth has been occurring in consumer demand. A strong expansion in housing construction is now under way.
Specifically on investment they highlighted the uncertainty in the economy at the moment noting:
Signs of improvement in investment intentions in some other sectors are emerging, but these plans remain tentative as firms wait for more evidence of improved conditions before committing to significant expansion. Public spending is scheduled to be subdued.
On the Aussie dollar too they were much more forthright in their outlook changing the rhetoric from:
The decline in the exchange rate from its highs a year ago will assist in achieving balanced growth in the economy, but less so than previously as a result of the rise over the past few months. The exchange rate remains high by historical standards.
To a much stronger signal to markets that they want rates lower in this month’s statement.
The exchange rate remains high by historical standards, particularly given the declines in key commodity prices, and hence is offering less assistance than it might in achieving balanced growth in the economy.
They aren’t worried about inflation and feel the employment market won’t recover too quickly and it will “be some time yet before unemployment declines consistently”.
All of which leaves with another statement that “the most prudent course is likely to be a period of stability in interest rates.” But while the RBA remains of the view that monetary policy should provide growth in the 2-3% range the risk appears to be growing from their change in language that rates will be cut if the RBA deems them necessary.