The RBA Will Wait for Q1 CPI Data Before Cutting Rates in May

“I wondered why the baseball was looking bigger and bigger.  And then it hit me.”

This could well sum up the decision of the RBA today to leave rates on hold for an extra month.  With the run of soft economic data coming at it faster than a Babe Ruth slug over left field, the RBA has said it will wait until it sees the March quarter CPI before cutting in May.

An odd decision to wait for a number that will show the average price of a basket of goods and services in January, February and March and divide that number by the average price of those same goods and services in October, November and December 2011 to set interest rates that will impact on the economic and inflation in late 2012 and into 2013.

I gave the RBA more credit for being pre-emptive and looking at forward rather than lagging indicators when deciding monetary policy.

I guess we could also look at the RBA decision in this context:  

• If the underlying CPI comes in at 0.4% or less, the RBA can cut 50 basis points – after all, the annual rate of inflation will be heading to a number with a “1” handle and the economy is not getting any help from the AUD or fiscal policy (more on that below).

• If the underlying CPI comes in at 0.5% to 0.8%, it will cut 25 basis points.

• An underlying CPI above 0.9% would probably justify its “on-hold” decision.

I was wrong thinking that the RBA has enough information to cut interest rates today.  But it is hard to get past the notion of almost 4 years of GDP growth averaging only a touch above 2%; where job creation has stopped; where inflation is locked around the middle or lower part of the target; and house prices are so very weak; that the RBA wouldn’t edge rates a little lower.

There was a notable gap in the RBA commentary today.  There was no mention of a part of the economy that is one-fifth of GDP – double the size of mining, four times bigger than housing construction, about the same size of the retail sector - that is government demand.

Like it or not, government demand will be cutting GDP growth next year. 

Whatever the RBA Board may think of the Budget, it clearly does not share the view of parts of the business sector, some scaredy-cat columnists and many market economists that the fiscal policy strategy of the Gillard Government will drive the economy or parts of it into recession.

If the RBA thought this was even a rough chance, it would have cut interest rates today.