Big picture's pros and cons mean no change

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The Reserve Bank of Australia left the cash rate on hold this month but it sounds as though the decision was by no means cut and dried.

Governor Glenn Stevens yesterday painted a mixed picture of the global and domestic economies.

Europe was weakening with the risks bunched on the downside, but the US was emerging from a mid-2011 soft patch and enjoying a moderate expansion.

At the same time, China's economy has changed back a gear but was still looking robust.

Locally, the economy was patchy but growth was "close to trend" - a term never defined by the bank but thought to refer to the long-term average gross domestic product growth rate of 3 to 3.5 per cent - although the labour market had softened.

Underlying inflation was close to the middle of its 2 to 3 per cent target range and expected to stay in the band for the next one or two years.

In the end, with lending and borrowing rates around normal, the board decided the case for cutting the cash rate was not strong enough to prompt the move.

"With growth expected to be close to trend and inflation close to target, the board judged that the setting of monetary policy was appropriate for the moment," Stevens said.

But a cut has clearly not been ruled out.

"Should demand conditions weaken materially, the inflation outlook would provide scope for easier monetary policy," he said.

With that in mind, the legion of bank-watchers in the media and the financial sector will be looking closely at measures of demand - spending on goods and services - before the board's next monetary policy meeting on March 6.

They will include numbers like January retail trade figures on February 29 and January building approvals and December quarter capital spending on March 1.

But they will also include the January employment figures on February 16.

Strictly speaking, employment is not a measure of demand but it's a lot harder to spend if you don't have a job, so the jobs data will figure strongly in the bank's thinking.

And if the euro area slides into disarray, then there would also be a negative effect on demand within Australia.

So although the bank identified weak demand within Australia as a potential trigger for another rate cut, there are a number of indicators that could affect the outlook for demand.

- AAP