In an attempt to make clear that it still has a bias to ease interest rates further, if need be, the RBA has linked the possible cuts to a further decline in inflation in coming months.
"Monetary policy has been eased significantly, Governor Glenn Stevens said in the statement issued after yesterday’s board meeting which left the cash rate steady on 3%.
That helped keep the stockmarket at and around its highs for 2009.
"Market and mortgage rates are at very low levels by historical standards," Mr Stevens said in his statement.
"Business loan rates are below average.
"Much of the effect of this is yet to be observed.
"Fiscal measures are also providing considerable support for demand.
"Nonetheless, the prospect of inflation declining over the medium term suggests that scope remains for some further easing of monetary policy, if needed."
That sentence was nowhere to be seen in the statements after the May or any other meetings.
It’s rare, extremely rare to see the Australian central bank link further monetary policy easings (AKA rate cuts) to declines in inflation. It does happen, but not so explicitly.
And, what could cause the RBA to cut rates again?
A sharp rise in unemployment, starting with next week’s employment figures for May.
And how will inflation ease?
By the continued rise in the value of the Australian dollar; which was over 82 cents in trading overnight, a nine month high, and by the continuing impact of the recession.
The RBA pointed out in yesterday’s statement that "With demand for labour weakening, growth in labour costs is beginning to fall.
"These conditions are likely to see inflation continue to abate over the next two years."
So two years of little or no interest rate movement (upwards), so long as inflation remains low.
That’s a big ask in Australia where inflation is part of the national whine and seems endemic some weeks.
It’s also a sign the RBA also sees activity in the economy as being weak for much of the next two years.
But the Aussie dollar is up 35% since its lows and rose 6% in trade weighted terms last month (which was nearly half the 14% rise for 2009 so far).
Its hurting export returns, tourism and others, but it is softening the impact of the rising price of oil at the petrol pump.
In the statement after the May 5 meeting, Governor Stevens said something very different about inflation:
"With demand for labour weakening, growth in labour costs will probably also fall.
"These conditions are likely to see inflation continue to abate, though this is occurring only gradually so far, as the effects of the decline in the exchange rate are pushing up some prices."
No mention after the May meeting of "the prospect of inflation declining over the medium term".
In fact it was the lower dollar ”pushing up some prices”.
In fact so long as this rebound in markets continues without any significant or dislocating correction, we can expect to see interest rates at this current very low level for sometime to come, if not lower, if the Aussie dollar takes another spurt upwards.
And, so far no fears whatsoever about the size of the Federal Government deficit or its borrowing campaign in coming years.
In financial markets it’s a non-story, despite the best efforts of the Federal Opposition to make it one.
Reaction from economists varied:
Rory Robertson from Macquarie said "It’s a further confirmation of their easing bias, though they pointedly note that it will only be done ‘if needed’.
"The story that’s been emerging in the last few weeks is that low rates are promoting growth.
"Home construction and home prices are turning higher, showing that policy is working.
So, the RBA is on hold for the foreseeable future, and we’re less sure that there will be any further rate cuts at all."
But Adam Carr, chief economists of ICAP was more negative and told AAP:
"The Reserve Bank has a clear bias to ease further if needed.
"They suggested that inflation will moderate over the medium term. My expectation is that inflation won’t moderate sufficiently over the near term.
"I don’t think they will ease again, given the domestic and global economy recovery.
"I think rates will be on hold until the end of the year with a potential for a rate hike by December."
The Governor’s statement in full said:
Evidence has continued to emerge that the global economy is stabilising, after a sharp contraction during the December and March quarters.
"The considerable economic policy stimulus in train in most countries is helping to contain the downturn, and should support an eventual recovery.
"The turnaround is clearest in China and some other emerging countries. Recovery in the major countries is likely to take longer to begin and be slower when it does occur.
Prospects are being helped by better conditions in global financial markets.
"Confidence, while improving, nonetheless remains fragile and balance sheets are under pressure from the effects of economic weakness on asset quality.
"Credit remains tight. Continued progress in restoring balance sheets is essential for a durable recovery.
"The Australian economy has been contracting. Capacity utilisation has fallen back to about average levels, and will decline further over the rest of the year.
"With demand for lab
