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The RBA Minutes from the February meeting reinforced that the RBA sees scope for a further easing in monetary policy if the economic outlook weakens “materially”. However, for now it feels that the 50 basis points cuts in late 2011 are enough. Lending rates are near average levels, growth is expected to be close to trend for the next couple of years and the inflation outlook is consistent with the target.

Some stability in the global economy and domestic data has allowed the RBA to pause for a few months. Globally, while Europe is in recession, the US outlook has improved, and the Chinese economy continues to grow strongly, albeit at a slower pace than recent years.

Domestically, the unemployment rate has steadied (although employment growth has slowed), house prices appear to be stabilising, business credit has picked-up and business conditions are around average levels. Resource investment remains strong, but conditions in a number of other industries remain subdued – retail spending in particular was slow in January.

The RBA expects that underlying inflation will remain within the 2-3% target range for the next few years, which gives them some room to manoeuvre with lower cash rates if the activity outlook deteriorates from their current scenario. The RBA has also noted that bank funding costs are rising. Banks’ overall cost of funding relative to the cash rate has risen, narrowing the difference between banks’ lending rates and funding costs. If funding pressures intensify and lead to further rises in banks’ lending rates, it could prompt the RBA to cut again.

We expect that the RBA will ease again in the first half of this year, a combination of ongoing softness in the non- resource/mining sectors and tighter financial conditions. The most likely timing is in May, following another good consumer price index outcome in late April.