No change to interest rates today: what can it mean? Have the Reserve Bank Governor and his team been rolled? Were the nervous nellies and the backside coverers more persuasive? Weren’t the signs of increasing inflation convincing enough? Is the economy headed for old-fashioned crisis later in 2005 or beyond?

All these questions will search for answers over the next few weeks – indeed, until the May meeting of the RBA Board, when we will go through the whole charade again. The disappointing thing with the RBA’s ‘no explanation’ policy is that uncertainty will fester until an opportunity emerges – ad hoc – for the Governor to clarify the Bank’s latest thinking.

With the inflation genie now out of the lamp – consumer prices are rising at an annualised 4% pace in the latest quarter according to the Melbourne Institute TD Securities index – signs that the RBA is “behind the curve” will soon prey on financial markets. Any relief rally today will be short-lived as data emerges of further inflation in the pipeline. Read more here.

Meanwhile top ANU economist and Ned Kelly lookalike John Quiggin writes:

In macroeconomic terms, the RBA decision to keep interest rates unchanged looks like a good call. With the levels of indebtedness we have in Australia, the risk of overkill, as seen in 1990, is greater than the risk of delaying. Although the evidence is patchy, the claims that economic activity has peaked look quite plausible. On most reasonable estimates, interest rates are still below their ‘neutral’ level and it looks as if they can’t go significantly above this level without producing substantial damage

In microeconomic terms, the decision looks far less appealing. Interest rates represent the price of current consumption in terms of future consumption. If they are permanently held below their equilibrium (roughly the same as neutral) level, the result must be too much consumption and too little saving and Australia has seen this in spades, with negative rates of household savings for some years. Not surprisingly, this has been accompanied by a boom in asset prices, particularly for residential land. This in turn has been associated with a shift in investment towards housing which, since it produces non-tradable services, is not helpful in addressing a huge current account deficit. Read more here.

Christian Kerr, Crikey’s political correspondent, writes:

That whistling sound you heard this morning was the PM and Peter Costello sighing with relief. Many economists believed the Reserve Bank would jack rates up by another 0.25%, as a result of constrained economic capacity and inflationary pressures.

The sighs of relief were so loud because while oil prices are fuelling inflation, Howard Government policies, rather than external economic pressures, are behind the belief that rates will have to rise.

The single biggest cause of upward interest rate pressures in Australia is the desperate $66 billion spending spree Howard and Costello embarked on last year to get re-elected. While they’re sighing with relief now, it will look very nasty if Howard and Costello get hit with the hangover from their binge at Budget time.