RBA leaves door ajar

THE Reserve Bank of Australia has left the possibility of further interest rate cuts on the table.

The central bank says it’s ready to cut interest rates again if necessary to keep up the level of spending in the economy.

But the statement issued by RBA governor Glenn Stevens after its board’s monthly monetary policy meeting on Tuesday gave no sign that it’s about to make its move - or even that it believes the move is more likely than not.

“The inflation outlook, as assessed at present, would afford scope to ease policy further, should that be necessary to support demand,” the RBA said, using the exact wording as the February and March statements.

There were some changes in the accompanying commentary, but the essence was the same.

On the plus side, the earlier rate cuts are starting to have an effect - including on the housing market - and non-mining business investment is expected to pick up.

On the minus side, the mining investment boom is about to peak, credit growth is still weak, the Australian dollar remains stubbornly and surprisingly high, and fiscal policy - the race to get budgets into surplus - is a drag on growth.

Whether the pluses or minuses get the upper hand over the coming months is the big question.

However a benign outlook for price rises gives the RBA some latitude to respond if the negatives win out.

Consumer price inflation is currently running at around 2.25 per cent in both headline and underlying terms.

“Labour costs remain contained and businesses are focusing on lifting efficiency,” the RBA said.

“These trends should help to keep inflation low, even as the effects on prices of the earlier exchange rate appreciation wane.”

Whether the focus on efficiency has indeed sharpened, as the RBA believes, or the recent pickup in labour productivity is just the normal kind of upswing seen as the economy recovers from a slow patch is a matter for conjecture.

Either way, the RBA is clearly less worried about labour productivity than it was over the previous couple of years.

Faster labour productivity growth means the RBA can allow faster economic growth before inflation goes over the red line.

As a result it’s also less reluctant to give the economy a kick along with a rate cut or two, if needed.