Economics Updates

The Minutes from the RBA meeting held on Dec 6th show the bank is concerned about a "non-trivial possibility of a very sharp contraction" in Europe leading to slower global growth in 2012.
Whilst accepting that the Australian economy was "expanding at a pace broadly in line with trend" and that "Australia's main trading partners were also still recording solid growth", the Bank accepted that the argument for a "modest reduction in the cash rate" warranted by troubles in Europe and a slowing in infaltion was compelling and cut the Cash Rate by 25bps to 4.25%.
Whilst obviously leaving the door open for further cuts to come if the European situation worsens, we read the minutes as indicating the Bank is now comfortable with rates at current levels. The Minutes highlight the ongoing strength of the Australian economy but also comment on the fact that data coming from the US "had shown a more positive tone" and that forecasts for growth in 2012 were now at 2.5% (or a little higher) for 2012.
On China the Minutes note that while data continues to show a slowing, the numbers "were still consistent with solid GDP growth" and that "slowing was in line with the authorities’ intentions".
The full minutes are available here.

The minutes from the RBA's meeting of Feb 7th were released this morning.
The meeting surprised most in the market (although not readers of this blog!) by leaving the Cash Rate unchanged at 4.25%. The minutes show that, whilst there is still concern that the European debt crisis could cause major problems in the future, these concerns had moderated since the Bank's Dec meeting. The Bank also noted the improvement in conditions in the US.
Domestically it is clear that the Bank were happy with their policy settings as they were; given that growth is now forecast at "about trend" for 2012-13, that inflation remains within target, "albeit in the upper half of the target range by 2014", and that unemployment remains steady at around 5.2%.
In keeping the Cash Rate unchanged the Minutes conclude that "if demand conditions were to weaken materially, the inflation outlook would provide scope for a further easing in monetary policy" (my emphasis). In essence the Bank is keeping its rates-powder dry in case of a significant worsening in the future. Unless Greece implodes or unemployment here rises rapidly we see little to encourage for further rate cuts in the next few months.
The markets have signifcantly weakened their betting on further rate cuts in the past week with futures now forecasting 4% by May when earlier this month they were pricing in 3.5% by mid-year. We never agreed with their earlier optimism for lower rates but are happier considering a 25bps cut by mid-year...if there is a need.