RBA keeps rates ammunition in reserve

The Reserve Bank of Australia (RBA) is keeping "its powder dry" in the face of
coming tough times for the economy, leaving the official cash rate unchanged on
Tuesday.
The decision to leave the rate at a 45-year low of 3.25 per cent following its
monthly board meeting came less than 24 hours before the release of December quarter
national accounts.
There is a risk the report could show the economy entered a "technical" recession in
the final six months of 2008.
But Commonwealth Securities chief economist Craig James said the RBA's decision
highlights its confidence in Australia's economic fundamentals.
"By keeping its powder dry today the Reserve Bank has plenty of ammunition to use if
there is another, more dangerous downward leg to the global slowdown," Mr James
said.
While many economists had predicted a further cut of between 25 and 50 basis points,
they said there was always a chance the central bank would stay put on rates to
gauge the impact of 400 basis points of rate reductions and the government's two
economic stimulus packages.
Financial markets are still pricing in the risk of another 100 basis points of cuts
this year.
Commenting on the decision, RBA governor Glenn Stevens said "the board judged that
the stance of monetary policy was appropriate for the moment" and that it "will
consider the position again at its next meeting".
He said demand had not weakened as much as in other countries and Australia had not
experienced the sort of large growth contractions seen elsewhere.
"There has already been a major change in both monetary and fiscal policy," Mr
Stevens said in a statement.
"Market and mortgage rates are at very low levels by historical standards and
business loan rates are below recent averages."
While new data showing a stronger than expected exports performance in the December
quarter lessened the threat of the first quarterly negative gross domestic product
(GDP) outcome in eight years, it does remain a risk given the mixed flow of data in
recent weeks.
At the same time, the flimsy 0.1 per cent growth recorded in the September quarter
could easily be eroded away to a negative as the Australian Bureau of Statistics
commonly revises its figures.
A technical recession is two consecutive negative quarters of economic growth.
Federal Treasurer Wayne Swan again appeared to be softening up expectations for a
grim GDP report, saying "things will get worse before they will get better".
"We are in a difficult time in our national economy and we face big global
challenges," Mr Swan told reporters in Sydney just after the RBA's rate decision,
echoing sentiments expressed on Monday.
But there are signs that last year's $10.4 billion stimulus package "cushioned" the
economy and spilled over into consumer spending in January.
New data shows retail sales touched a record high of $19.2 billion in January, a
seasonally adjusted 0.2 per cent increase on December.
This is on top of the 3.8 per cent surge in December when the government doled out
cash payments to pensioners and carers as part of its stimulus package.
Economists had expected a 0.5 per cent decline in January sales.
Assistant Treasurer Chris Bowen wouldn't speculate on the outcome of the national
accounts.
"The only thing that is certain about tomorrow's figures, that if there hadn't been
a national building package and the economic securities package, the figures that we
see tomorrow would have been substantially worse," Mr Bowen told Sky News.
But Opposition Leader Malcolm Turnbull said there was no evidence that the "cash
splash" from December had any positive effect beyond a slight increase in retail
sales.
"In fact there is a report from Westpac today ... which estimates that 75-80 per
cent of the $10 billion that was handed out in December has been saved," Mr Turnbull
told reporters in Sydney.
"These one-off payments, at times like this, are for the most part going to be saved
or used to reduce debt and that means they are not going back into the economy to
promote economic activity and jobs."