The impact of the natural disasters and the resulting supply disruptions following the Japanese earthquake/tsunami have taken their toll on an economy that was already in the midst of cooling, following last year’s rapid rate hikes.

The Reserve Bank noted the weakness in housing activity, generally subdued business conditions, lack of consumer spending, and modest falls in asset values as the key drags on the economy. In addition the slowdown in the economy has provided policymakers with more time to assess the inflationary pressures on the economy and as members noted “it would be prudent to use that time”.

Overall the minutes suggest that the Reserve Bank is firmly on the interest rate sidelines, however there was certainly no indication that rate cuts were likely to be part of the economic landscape in the near foreseeable future. Policymakers highlighted the sustained strength in mining investment and believed that the strong economic performance of Asian economies “meant that the medium-term outlook for the Australian economy remained strong”. Given this view it is more likely that the Reserve Bank will keep interest rates on hold until activity levels pickup before once again assessing the need for further rate hikes.

Interestingly despite the lack of household spending the Reserve Bank noted the imports of consumption goods had been strong over the past couple of months. However the latest import data may result in the Reserve Bank altering that view. In fact consumption goods imports (less cars) fell by 4.1 per cent on a year ago – marking the first fall in almost a year. No doubt the strong Aussie dollar has also been keeping down prices of imported goods but it has also been acting as a de-facto rate hike on other parts of the economy.

The next batch of inflation data (in late July) is likely to give central bank authorities a better picture of the inflation landscape. CommSec does not anticipate interest rates to move until at least November. If investment were to weaken or the sovereign debt crisis was to create contagion, the Reserve Bank would clearly review its tightening bias.

CommSec believes that the next move in rates will most likely be up, but not until November at the earliest. But a rate hike is by no means assured. For the Reserve Bank to start lifting rates again, it will need to see a substantial improvement in the business environment, and be of the belief that underlying inflation is again rising to the extent that its three percent ceiling will be breached, or likely to be breached. And clearly that’s not the view at present.

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