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RBA reveals reasons to keep rates on hold -

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PETER CAVE: Europe is in dire straits. America is nearing the bottom of its recession. And China -
hopefully - is going to save us here in Australia.

That's the thinking behind the decision by the Reserve Bank not to cut interest rates this month.

The minutes of the RBA board meeting, released late this morning, show that the central bank
believes the global economy is "stabilising" after the sharpest slump since the Great Depression.

But the Reserve Bank Governor warned in a speech this morning the recovery will be slow.

Our Economics correspondent Stephen Long has joined me in the studio with more on the story.

Stephen, it seems that the Reserve Bank looks pretty positive about the outlook?

STEPHEN LONG: Very much so, Peter. This confirms that the Reserve Bank thinks that the global
economy is going to begin recovering in the second half of this year.

They see the recession globally bottoming out at the moment, and a recovery commencing at least by
2010 with a gradual pick-up over the next six months or so.

Although, it has to be said, when you actually read through the minutes, it's not looking that
good, on the Reserve Bank's own admission. The Eurozone is very weak. If you look at what it says
in America, all it really says is that the pace of contraction is slowing.

The big ticket item that they see where things are really positive is in Asia and China in

And they note that Asian economies are showing signs of recovery, while the best that could be said
for the global economy as a whole is that output is beginning to stabilise after earlier sharp

But that's enough to make them think that Australia will continue to fare better than the rest of
the world, and recover a lot better than the rest of the world too, because of our links to China.

Glenn Stevens is very positive about China. He spoke at a business breakfast this morning in
Sydney. Here's what he had to say.

GLENN STEVENS: I don't think there's any doubt that there's a genuine pick-up in economic activity
- quite a significant one - happening in China in the first four or five months of this year.

I think a wide range of data sets show that, and as we work out the quarterly growth numbers
through sort of a mystical process, out of the year ended numbers that they publish, but I think
it's pretty clear that quarterly growth pace has picked up, and the March quarter was the best
quarter for about three quarters.

So it's real; the durability of it is the open question, and that is a question to which we won't
really know the answer I don't think at this point.

PETER CAVE: RBA Governor Glenn Stevens there.

So the idea that Australia may well escape the worst of it by being China's quarry may be right
after all?

STEPHEN LONG: If they're right, and Glenn Stevens has put that qualification in about the
durability of the improvement in China.

But if they're right, essentially what the Reserve Bank is doing is resurrecting a thesis known as
"decoupling", Peter.

At the beginning of the global downturn, there was a theory that China, Asia, could escape the
recessionary conditions in the US and Europe, and that Australia, by being China's quarry, would
basically escape the worst of it too.

Now that decoupling thesis seems to be back in vogue. But the real question is whether Chinese
growth is sustainable. They've thrown in four trillion yuan - billions and billions of dollars in
economic stimulus - and they've also instructed the state-run banks to lend lots of money.

Now the question is: can they keep it going?

There are a lot of white elephants being built right now in China.

PETER CAVE: The Treasury forecast which came out with the Budget last week were attacked by many as
being too optimistic. Now we have the RBA's view. Are they singing from the same hymnbook?

STEPHEN LONG: They are. At first blush it might look like they're not, because the Reserve Bank in
its board minutes is stressing that the growth, the pick-up from growth will be slow, very, very
slow in Europe, but they still say it will be slow here and slower than past recessions.

But when you break it down, they're still looking, as the Treasury is, at above trend growth from
2011 on.

And Glenn Stevens was at pains to stress that there's not a hair's breadth between the forecasts of
the Treasury and the Reserve Bank when he spoke this morning.

GLENN STEVENS: As I read the forecasts, I think that those forecasts that are in the Budget are not
materially different to the two-year horizon that we have ourselves. The initial part of the
forecast recovery's pretty slow.

PETER CAVE: Our RBA Governor again.

How does the Reserve Bank see the outlook for inflation?

STEPHEN LONG: Well, they see inflation coming down and not being a problem. But one of the
interesting things Peter, is that they still seem to have a bit of vestigial hawkishness about

They note in the minutes of the last board meeting that the supposed fall in the consumer price
index on the most recent quarterly numbers pretty much disappears if you strip out lower interest
rates, which are one component that the Bureau of Stats looks at.

And if you take that away then inflation was still growing by 0.8 per cent in a quarter. Now do the
maths and times that by four and you've still got inflation above the Reserve Bank's 2 to 3 per
cent comfort zone.

And so you know, they're still a little bit concerned but they think that as people lose their jobs
here, then it will undercut the sustainability of the price increases and inflation will disappear
as a problem.

Now overall with their outlook, in terms of the recovery that they're stressing, it will all depend
on whether these green shoots grow. And there are, even on the optimistic notes of the Reserve
Bank, Peter, questions about the durability and sustainability of that; the green shoots could
still wither on the vine.

PETER CAVE: More of those green shoots. Our economics correspondent Stephen Long live in the