The most intriguing news in the Reserve Bank’s board meeting minutes for April 1 is that the bank has stepped up its chats to retailers and it now expects inflation to rise less than forecast back in February.

It expects the March quarter Consumer Price Index, out next Wednesday, will be high — above 4% — but it’s now looking for a faster pace of easing over the next two years. A rate cut might happen a bit sooner than later, especially with housing finance, building approvals and retail sales sliding in February.

The minutes, released this morning, confirm the bank was more relaxed about the economy and the outlook for inflation than it was in February or March:

Members were informed that the CPI data for the March quarter, to be released towards the end of April, were likely to show inflation of around 4 per cent on a year-ended basis in the March quarter. A large quarterly increase was expected partly because of recent rises in retail petrol prices.

Underlying inflation was also expected to rise in year-ended terms in the March quarter, before declining over time.

The staff’s inflation forecast through to 2010 would be revised after the release of the March quarter CPI, but the preliminary assessment, based on current policy settings, was that inflation on both a CPI and underlying basis would fall by a little more than earlier thought over the next two to three years. This was premised on demand growth slowing sufficiently to reduce capacity pressures.

The bank had been looking for inflation to be around 3-3.5% in 2009 and 2010. That might now indicate the bank sees inflation more around 3%, even a touch less late next year, which would open the way for a rate cut in the first quarter of 2009. If activity and demand continues to slow at the recent rate, the bank is giving itself the flexibility to cut rates sooner.

But it was the tidbit about the retailers that was fascinating as it indicates the levels to which the bank and its staff are talking to companies in the “real world” on a more frequent basis.

And the bank seems to have anticipated the slowdown in retail sales in January and February, and now expects sales in the March quarter to have been “flat”. And we haven’t seen the March figures yet!

Retail sales were flat in January, following large increases over the course of 2007.

The staff’s liaison with retailers, which had been stepped up over the recent period, suggested that sales had been flat in the March quarter as a whole.

Consumer sentiment had fallen sharply over the past few months, most likely reflecting tighter financial conditions and the financial market turmoil more generally.

When an organisation like the Reserve Bank steps up its contacts with companies and others in the wider economy, you know they are trying to find the earliest possible sign of either a slowdown or evidence that the current policy approach wasn’t working and another rate rise was needed.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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