Falling inflation could lead to another official interest rate cut even though the Reserve Bank of Australia (RBA), as expected, decided to stay on the rates fence for another month.The RBA’s board held its monthly (except for January) monetary policy meeting on Tuesday.

At the end of the meeting the RBA governor Glenn Stevens issued a statement confirming the interbank overnight cash rate, the benchmark for short-term rates in Australia, would stay at 3.00 per cent.

The cash rate has been at that 49-year low since April where it steadied after an eight-month series of cuts from a 12-year high of 7.25 per cent.

The reasons given for the decision were a virtual repeat of the statement made a month earlier.

There are signs the global economy is steadying but risks still abound, while the Australian economy is showing signs of life in the housing sector though business investment is being pared back.

Against this uncertain background, the RBA is content to sit back and assess the delayed effect of the policy stimulus that has already been applied, including lower interest rates.

“The effects of these changes will still be coming through for some time yet.

“Fiscal measures are also providing considerable support for demand,” Mr Stevens said.

At the same time, the recent weakening in demand for labour would reduce growth in labour costs, while capacity utilisation had fallen.

“These conditions should see inflation continue to abate over the period ahead,” Mr Stevens said.

The decision by the Australian Fair Pay Commission on Tuesday to keep the minimum wage unchanged, announced shortly before the RBA’s no change in interest rates, should exacerbate any slowdown in wages growth.

The consumer price index (CPI) rose by 2.5 per cent over the year to the March quarter.

The latest official forecast from the RBA, in May, has inflation abating further to 1.5 per cent, with the June quarter numbers due on July 22, and staying at, or below, the two to three per cent target until at least the end of 2011.

The prospective easing in the inflation rate leaves the door open for another rate cut if monetary and fiscal stimulus does not do the trick.

“The (RBA) Board’s current view is that the outlook for inflation allows some scope for further easing of monetary policy, if needed, ” Mr Stevens said in the RBA statement.

“In assessing how it might use that scope, the Board will continue to monitor how economic and financial conditions unfold and how they impinge on prospects for a sustainable recovery in economic activity,” Mr Stevens said.

Of course, economic and financial conditions can only unfold so much in four weeks, so the cash rate is likely to be kept on hold in August as well.

In fact the glacial pace of the economy’s reaction to policy changes means interest rates could stay on hold until well into next year - the RBA is not expecting a quick recovery so its absence will not necessarily prompt a rate cut.

Although the RBA has not forecast a specific number for the peak in the unemployment rate, its outlook for gross domestic product (GDP) is similar to the Treasury’s, so it is probably expecting unemployment to top out near 8.5 per cent as well.

If the trajectory of unemployment, 5.7 per cent at last count in May, looks to be worse than that - implying more downside risk for inflation, then a rate cut this year is possible.

Even then, the monthly volatility of the labour force figures means it would take at least few months of data before that point might be reached.

AAP