􀂄 The RBA left the cash rate unchanged at 4¼% after the April Board meeting.

􀂄 But disappointing growth outcomes mean a rate cut is on the table for discussion in May.

􀂄 A benign QI CPI outcome would push that cut over the line.

Speculation built over the past week that the RBA might deliver a rate cut at today’s meeting. In the event, the RBA has
opted to leave the cash rate unchanged at 4¼%.

Nevertheless, there was a broad hint that a rate cut will be on the table for discussion in May. The pace of activity is a little weaker than expected but due diligence requires waiting for the QI CPI (due 24 April) “before considering a further step to ease monetary policy”. We are happy to hold with our May rate cut call as a result.

The policy debate over the last month has focussed on a QIV GDP print below the trend-type outcome that the RBA (and others) had assumed, weakness in some domestic indicators that suggested below-trend growth persisted into QI and lingering fears about Chinese and European prospects. The impact of the high Aussie dollar has also featured in the debate.

The RBA’s interpretation of these events is:

• while output growth was below trend in 2011, domestic demand grew at the fastest pace in four years;

• while labour market conditions are soft, the unemployment rate is little changed;

• while Chinese growth has moderated, that was as intended; and

• while Europe remains “a potential source of adverse shocks”, market sentiment has improved and capital markets are functioning.

To this list we would add the tendency for GDP estimates to be substantially revised. The flood-affected QI 2011 GDP reading, for example was initially reported as a fall of 1.2%. Revisions now put the decline at a more modest 0.3%. The data flow has also been skewed towards those parts of the “patchwork” economy where the softness resides, such as retail spending and residential construction. In contrast, an ABS release showing record high levels of actual and planned mineral exploration spending went largely unnoticed.

There was little discussion on the AUD in today’s Statement. The RBA noted that the currency “remained high”. But there was a veiled suggestion of concern given that the Aussie remained at elevated levels despite a drop in the terms of trade. The QI CPI (due 24 April) is the next big marker for RBA watchers. We expect the underlying CPI to rise by 0.6% in QI, putting annual growth at 2.4%. These sorts of numbers won’t stand in the way of a rate cut if that is the intent.

The other key marker is the March jobs data (due 12 April). The RBA has elevated the importance of this data in recent commentary by noting that the unemployment rate is probably the best guide to how the opposing forces at work in the economy are balancing out. An upward trend would be the signal that the negatives hold sway.

The labour market data may be the one fly in the ointment complicating the case for a May move. While the RBA characterised the unemployment rate as “little changed for some time”, the ABS jobless trend has actually fallen over the past couple of months. And a range of leading indicators are pointing to job gains in the period ahead.

The above artilce is courtesy of teh Commonwealth Bank Economics department