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RBA leaves door open to rate cut

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SYDNEY, Feb 5 AAP

February 05 2013, 3:25PM

The door is open, but the Reserve Bank of Australia (RBA) is baulking at the threshold.

After its board held its first monetary policy meeting of 2012 on Tuesday, the RBA announced it would keep the cash rate at 3 per cent.

But it stands ready to deliver another cut, one which would take the benchmark interest rate to its lowest level for over half a century, if needed.

And that's because inflation is under control.

With both headline and underlying measures running at about 2.25 per cent at last measure, the current pace of inflation is consistent with the two-to three per cent target, the RBA said in the statement issued by its governor, Glenn Stevens, after the meeting.

Softening labour market conditions and an unemployment rate "edging higher" are expected to contain labour costs, while "moderate demand growth" would encourage businesses to focus on efficiency, the RBA said.

As a result, inflation should stay low.

"The Bank's assessment remains that inflation will be consistent with the target over the next one to two years," the RBA said.

That outlook has kept the door to further rate cuts open.

"The inflation outlook, as assessed at present, would afford scope to ease policy further, should that be necessary to support demand," the RBA said.

But it's clearly not ready to go through the door just yet.

And that's because it's not convinced it needs to.

For one thing, the full effects of earlier rate cuts are yet to flow through.

Some effects can be seen - parts of consumer spending are up and housing prices and housing construction are showing signs of growth, while there are signs that investors are starting to look more to higher-return assets.

At the same time, though, the two main conduits for the effects of easier monetary policy - a lower exchange rate and increased demand for credit - are not flowing freely.

"On the other hand, the exchange rate remains higher than might have been expected, given the observed decline in export prices, and the demand for credit is low, as some households and firms continue to seek lower debt levels," the RBA said.

So there is some uncertainty about the timing and extent of any more flow-through of the earlier rate cuts.

There's also uncertainty over one of the main drivers of growth in recent years - the resources investment boom - and how the economy will respond as it wanes.

"Looking ahead, the peak in resource investment is approaching.

"As it does, there will be more scope for some other areas of demand to strengthen," the RBA said.

The Australian Bureau of Statistics (ABS) survey of capital spending, to be updated with projections for 2013/14 on February 28, will give some insight into just when that peak will occur or whether, as is possible, it has already been and gone.

And routine indicators, like retail trade and housing industry data, will show whether the widely heralded "rebalancing" of the economy is under way.

If, together, they show the economy is very likely to continuing growth "below trend" in the next two or three years, as the RBA predicts for 2013, then the central bank will be increasingly tempted to cross the threshold and lower the cash rate again.