Perhaps it was the surprise 0.2% rise in retail sales in January; perhaps it was just the normal caution of a central banker wanting to see what the huge loosening in monetary and fiscal policy would do to an economy clearly slowing, but not as dramatically as its major trading partners are.

In any case, the Reserve Bank today called a halt to the rate cutting that has delivered up 4% of cuts in five of the past six months.

The RBA’s decision won’t be followed by its peers in the UK, Europe and Canada which meet later in the week and are expected to cut their official rates again to try and soften what is already an intense slump.

The decision  to leave rates steady at 3.25% had been signalled for a couple of weeks by the bank and its Governor, Glenn Steven in various statements and speeches.

The sudden upsurge in financial instability around that saw a sell-off on sharemarkets around the globe yesterday (and starting Friday on Wall Street), wasn’t enough to change the RBA’s mind, as had been the case on three occasions last year.

Not even evidence of a weakening level of activity in the local economy was enough to get the RBA to cut rates.

“In Australia, demand has not weakened as much as in other countries and, on the basis of currently available information, the Australian economy has not experienced the sort of large contraction seen elsewhere,” Governor Glenn Stevens said in his post board meeting statement.

“The Australian financial system remains strong and the monetary policy transmission process is working to deliver large reductions in interest rates to end borrowers.

“Nonetheless, economic conditions are clearly weak, and given the speed and scale of the global economic deterioration and its effect on confidence, weak conditions are likely to continue in the near term. Inflation is likely to decline over time.”

“There has already been a major change in both monetary and fiscal policy.” Market and mortgage rates are at very low levels by historical standards and business loan rates are below recent averages, reducing debt-servicing burdens considerably.

“Together with the substantial fiscal initiatives, the cumulative decline in interest rates will provide significant support to domestic demand over the period ahead.

“On this basis, notwithstanding evident economic weakness at present, the Board judged that the stance of monetary policy was appropriate for the moment. ”

But the world remains fragile, even though there’s been an improvement in financial markets since November.

“Recent data confirm that the world economy has remained very weak following the sharp decline in demand that occurred late last year. The major industrial economies reported large contractions in output in the December quarter, as did a number of emerging market economies across Asia and eastern Europe. Many countries are likely to be experiencing further falls in output in the current quarter.

“Conditions in global credit markets have improved since November, but sentiment remains fragile. Share prices have weakened and banking systems in several major countries are still under pressure, as authorities work towards a resolution of the balance-sheet problems. Significant macroeconomic policy stimulus is being put in place around the world, but it is too soon to see the effects of those measures.”

Now it’s the fourth quarter growth figures tomorrow: with the balance of payments adding 1.5% to growth and government spending looking as though it might cancel that out, it could be down to the farm sector to give us positive growth for the second quarter in a row.

Peter Fray

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