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Economics

RBA > Waiting for inflation

MEconomicsMO>

So, the Reserve Bank has left interest rates on hold once again, at 4.25 per cent.

But the odds are it will have to cut next month, giving Tresurer Wayne Swan a welcome pre-budget present.

Most of the data leading into the RBA’s decision today pointed to a softening economy.

Earlier this week, building approvals fell nearly 8 per cent and Australia’s manufacturing sector fell back in to contraction mode.

This morning, we received official data showing retail sales rose only 0.2 per cent in February.

State by state, sales were down in New South Wales and Victoria, while the resource states of Queensland and Western Australia saw solid gains.

Food sales rose 0.3 per cent, clothing was down 1.4 per cent but department stores recorded a welcome 0.7 per cent increase.

But is this as good as it is going to get?

The food sales figures should be looked at closer because food prices are actually down.

The Coles versus Woolworths saga has seen the advent of price deflation, which may result in higher volume of sales, but not necessarily value.

Furthermore, an old collegue of mine, Michael Pascoe made an interesting point in one of his articles over the weekend, that maybe these low percentage increases in retail sales may be the norm from now on. Gone are the days of solid increases as consumers hold onto their cash, and the increase in popularity of online purchases drives consumers away from traditional stores.

Still, while retail sales have slowed, those numbers are still growing, ever so slightly, month on month.

Brian Redian, an economist at Macquarie did note however, that there might be a rebound in retail sales in the middle of this year, when households get their carbon tax compensation payments. As much as $600 could be directly spent on retailers in the same way Kevin Rudd’s one off $900 payment during the GFC was spent, predomantly on electronic goods.

In its statement today, the RBA board noted that Asian growth was also slowing, downgrading its view of China from being robust, to growing at a moderate and sustainable pace in the future.

It does however, now see, no deep downturn in global growth with financial markets around the world showing improvement in sentiment.

Still, it’s inflation that the Reserve Bank is waiting to see.

The RBA made it quite clear, it is waiting for the official CPI release later this month before it makes a move on the official cash rate.

NAB’s Rob Henderson predicts an underlying rate of below 0.8 per cent should prompt the RBA to cut. He’s actually forecasting a 0.6 per cent increase.

Similarly, CommSec’s Savanth Sebastian is expecting a May cut.

Westpac’s Bill Evans is sticking to his previous call that the low point in this interest rate cutting cycle will be 3.75 per cent.

The other deciding factor will be the unemployment rate.

Earlier today, Metcash became the latest retailer to wield the axe, slashing almost a tenth of its workforce, as it prepares to close 15 of its regional Campbells Cash and Carry stores.

Then again, if the RBA cuts next month, will the banks follow suit?

Last week the Reserve said that bank wholesale funding costs are down, so technically, that should mean the banks have no real excuse not to pass on any cut in full.

If they don’t, that could prompt the Reserve to go once again.

MEMO>ricardo

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