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Central bank governor Glenn Stevens was doing his bit to talk up the economic outlook in his biannual testimony to a Parliamentary committee this morning.
While prolonged uncertainty about key Budget measures is undoubtedly weighing on consumer and business sentiment, Stevens had a more reassuring message regarding the country’s growth prospects.
In short, the RBA governor thinks many of the basic building blocks necessary for a solid expansion are in place – funding costs are down, lenders are competing for business, household wealth is growing (despite rising unemployment and weak wage growth), the population is expanding and Australia remains linked in to the most economically dynamic region in the world, including strong 7.5 per cent annual growth in its biggest trading partner, China.
Added to this is the search by investors worldwide for higher yields (part of the explanation for Chinese interest in the Australian property market).
So what is holding things back?
Like a massive game of chicken, businesses and investors are waiting on someone else to be the first to take the plunge and gamble that now is the right time to begin expanding.
It is no wonder they hesitate. For the past five years, survival has depended on a conservative approach to risk – the search for growth has played second fiddle to the security of term deposits and other low risk ventures.
According to Stevens, many businesses are more intent on paying out dividends and returning capital to shareholders rather than dusting off plans for growth.
But, he has sought to assure us, such a period of risk-aversion is nothing new and will – at some indeterminate point – come to an end.
“It’s pretty normal at this point of the cycle,” Stevens told the House of Representatives Economics Committee in Brisbane. “There is always a period in which people can see that many of the conditions for expansion are in place, but aren’t yet fully confident it will happen.”
There are good reasons to hesitate. Risk and uncertainty abounds for those looking for it – an unresolved federal Budget, fragile economic conditions in Europe, geopolitical tensions in north Asia, turmoil in Iraq, Syria and Ukraine, and political gridlock on many important issues in the US.
But Stevens, in Ian Drury fashion, sees reasons to be optimistic, if not quite cheerful.
“Business will need to respond to trends that foreshadow sustainable increases in demand and incomes,” he said. “At some point, if these responses start to gather pace, the sorts of forecasts we are setting out at the moment will very likely prove to be conservative.
“The frustrating thing is that no one can say when that will happen, or just what might be the proximate trigger.”
As Rachel Hunter might have put it, “It won’t happen overnight, but it will happen”.
It means official interest rates are not going to go anywhere for some time yet.

Pity the Reserve Bank.
For several years now, successive governments have displayed a genius for getting the temper of the economic times almost exactly wrong, in the process forcing the central bank to do most of the work to prop up the economy.
Last decade they mortgaged the future by pretending the always-temporary mining boom would last forever, using the revenue windfall on transfers and handouts to families, superannuants and the corporate sector.
Now, just as confidence was returning and the property market had emerged from its post-crisis shell, the Abbott Government has unloaded with the sort of Budget you would expect to see for an economy in danger of over-heating – not one just ticking over.
The extent of the blow to confidence and growth is there in the numbers: a 16 per cent plunge in consumer confidence and the first drop in house prices in more than a year.
If the goal of Abbott and Hockey had been to knock the economy back on its heels, they could hardly have done a better job.
It means that the RBA’s hopes to move the official interest rate off its current “emergency low” have been postponed again, and instead a further rate cut must loom as a possibility.

At its meeting this morning, the RBA Board decided to hold the cash rate steady at 2.5 per cent, and it appears unlikely to be raising it any time soon.

As RBA Governor Glenn Stevens put it: “continued accommodative monetary policy should provide support to demand, and help growth to strengthen over time”.

Concerns that the property market was in danger of becoming overheated have receded for the time being, and inflation is unlikely to take off. In Fact, Mr Stevens thinks it will remain consistent with the central bank’s 2 to3 per cent target band “over the next two years”.
Instead, the economy might need more monetary policy air pumped into its tires – a move that might also, conversely, help deflate the stubbornly elevated exchange rate.

The sustained high value of the dollar is something the RBA, along with many others, remains bemused by: “The exchange rate remains high by historical standards, particularly given the further decline in commodity prices,” Mr Stevens said.
All of a sudden, a rate cut becomes tempting again.
But the bigger picture concern is that a historically low interest rate means the central bank has that much less ammunition if the global recovery falters and another crisis strikes.
And anyone who thinks that is improbable has obviously been hibernating in Antartica watching the glaciers melt.

In economics, as in most areas of life, no news is entirely good or entirely bad.
The renewed vigour of the currency in recent months has frustrated hopes of a competitive boost for non-mining exporters and import-competing businesses.
But as the Government, the Reserve Bank of Australia and business groups fret over the sustained strength of the dollar (which has been above US90 cents for the last six weeks), it has also been working – along with tepid global growth – to help hold the cost of imports down.
This is made clear in the breakdown of inflation figures between tradable and non-tradeable items.
The cost of tradeable goods and services – that is, those items whose prices are largely determined on the world market – rose by 0.4 per cent in the March quarter. While the cost of fuel, tobacco and medicines all went up, these rises were offset to a considerable extent by cheaper furniture, clothes, shoes (thank you, Boxing Day sales) and overseas holidays.
In the same period, the cost of goods and services whose prices are largely determined by the domestic market, climbed by 0.7 per cent, driven by rising electricity charges, a seasonal jump in school and university fees, and annual cut in the percentage of patients qualifying for Medicare and PBS subsidies.
The ace in the hand for the RBA as it contemplates the official inflation numbers is that wages growth is being held well in check by soft economic conditions and elevated unemployment. The Wage Price Index grew by 2.6 per cent in the year to the December quarter.
While an underlying inflation rate of 2.65 per cent is above the mid-point of the central bank’s 2 to 3 per cent target band, there is little in the March quarter CPI figures that are likely to surprise or alarm the RBA.
Combined with the fact that wage pressures are moderate, and the possibility that the currency may stay higher for a little while yet, there is nothing in the inflation data to suggest the RBA Board needs to begin pushing up interest rates yet.

Some of the CPI detail:
Headline inflation: up 0.6 qtr/2.9 annual
Underlying inflation: up 0.55 qtr/2.65 annual

Main increases(%)
Tobacco – 6.7
Secondary school – 6
Medicine – 6.1
Fuel – 4
Vegetables – 3.3
Electricity – 1.4

Main falls(%) Furniture – down 4.3
Clothing and footwear – down 2.1
Internat. and domestic travel – down 2.4