RBA Holds at 4.25% — neutral stance

Against market expectations, the RBA held their policy rate steady at 4.25% at their 7 February meeting. The upgrades in the post meeting statement suggest the RBA is now on hold at 4.25% and will ease the cash rate further only if things take a fresh turn for the worse (they are data dependent).

The statement modestly upgraded their global growth (they had responded to the IMF global growth downgrade with their Nov and Dec cuts) and financial market assessments, left the domestic growth and inflation assessments unchanged (growth at trend and inflation on target), and on net left the financial conditions assessment steady (asset prices are better, but the currency is hurting).

So where to from here? My guess is that the AUD is going to keep appreciating, and that the RBA will continue easing as a result. Also, the pass-through from RBA cuts to the broader economy is likely to be impaired by banks retaining some part of any easing that is delivered.

On that basis, I expect the RBA to reduce their policy rate by a further 50bps or so over the course of this 2012. These are likely to be 25bps cuts, most likely following the publication of low CPI reports.

So why not cut today? No one is any good at forecasting FX; and even if you knew the AUD, you would still not have a very clear idea what this meant for your inflation forecast – as transmission is a tricky beast.

The high AUD might, after all, reflect an FX market forecast of very strong growth prospects for the Australian economy – and this would indicate that the RBA’s next move would be to raise their inflation forecast.

So long as global trends remain firm, and Greece doesn’t leave the EUR, the next live RBA is likely to be in May.