The Reserve Bank has confirmed that it has lowered its economic forecasts, confirming earlier signals that rate cuts may now be off the table.

That’s a line of thinking is set to be reinforced by RBA Governor, Glenn Stevens, who is about to make a speech in Adelaide called “The Road To Recovery”.

That could contain a stronger signal that rate cuts are off the agenda for a while, as anything contained in the RBA minutes published this morning.

The minutes of the April 7 meeting show that the board was told:

…that there had been further downward revisions to the staff forecasts for growth and inflation. GDP was expected to fall in 2009 but increase again in 2010. The revised outlook for growth, and the associated reduced level of capacity utilisation, would entail stronger downward pressure on medium-term inflation than previously forecast.

As a consequence of the contraction in aggregate demand and output, capacity utilisation had continued to decline and the demand for labour had weakened. Members noted that the staff forecast for growth had been revised lower from that published in the February Statement on Monetary Policy. Inflation over the medium term was expected to continue to decline.

Something has to be explained to the board.

The results of that downgrade became public in a speech on March 31 by the bank’s Deputy Governor, Ric Battellino in Brisbane: “the reality is that we cannot fully insulate ourselves from what is happening elsewhere in the world. As such, GDP is likely to fall in 2009.”

The next Statement on monetary policy is due out on May 8, which is when we get a sight of the new forecasts.

In the February MPS, the bank forecast that growth would be barely positive; it predicted growth of 0.25% in the year to the end of the June quarter and half a per cent over the year to December (i.e. calendar 2009). Non farm GDP would be zero in the year to June and 0.25% over calendar 2009.

The bank’s forecast of a large than forecast fall in inflation was borne out in Monday’s Producer Price Index.

The 0.4% fall was a big slump from the December quarter and analysis published overnight by economists at Goldman Sachs JBWere showed it to be “the most rapid easing’ of inflation pressures in the PPI, despite a sharp rise in import price costs (because of the lower dollar).

“Though the downside headline itself is quite striking, even this understates the rapid moderation in inflation pressure. The ‘volatile items’ were actually stronger than our expectation. Instead the disinflation was in the more ‘sticky’ components, which we take to be more indicative of a broader and sustained period of disinflation.”

They also said it’s likely to show up in the consumer price index tomorrow, although rises in the cost of fruit and vegetables should be watched for.

But that’s how the RBA seems to have been looking at inflation in the April board discussions, so that means the economy is following some of the newly drafted script, which in turn means no immediate joy on when we can expect the next interest rate cut.

That April 7 meeting gave us a 0.25% cut and left the strong impression that the central bank would react to changes in the existing economic picture, not what was anticipated would happen, as the bank has been doing since the global economy fell off a cliff late last year.

Because of downgraded forecasts and the tentative signs of improvements in some parts of various economies around the world, the next rate movement might not happen until the central bank believes the current stimulus of higher Government spending and the 4.25% of cuts are needed to power the economy into a rebound.

Or, if the economy bottoms in the next quarter and is dragging along the bottom, there might not be a rate cut for months, if at all.

Peter Fray

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