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The two-speed economy is likely to lead the RBA to keep rates on hold, for now
The rising woes of Europe have prompted the RBA to take a more cautious approach to the domestic economy as signs emerge that growth in Australia may be slowing.
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Data from ABS shows the economy isn't returning back to trend growth as quickly as originally predicted.
The national accounts show the economy grew by 1.1 per cent in the December quarter, but then slowed to 0.5 per cent in the March quarter of 2010.
If this easing continues, the nation's growth will continue to trend below or close to the RBA's target zone of 2 to 3 per cent - encouraging governor Glenn Stevens to keep interest rates at neutral for most of this year as he seeks to manage Australia's two speed economy.
If it doesn't, the RBA will have to again increase its public inflation forecasts to the top of, or even above, its target zone. The RBA governor surely knows this would threaten the central bank's hard-won low-inflation credibility and force him into restrictive monetary policy mode once again.
But any increase in underlying inflation will ultimately be outweighed by the softer demand for housing and ongoing problems in Europe.
While the European Union has worked hard to contain the Greek sovereign debt crisis, the RBA said in its June board meeting that it would take a "wait and see approach" to the actions of European nations to bring budget deficits under control.
Similarly, the RBA is also likely to sit on its hands until it can establish the potential impact softening housing demand will have on domestic inflation pressures.
The latest statistics from RP Data show demand for housing has weakened, resulting in softer home value growth. Home values remained flat in April, with Australia's capital cities recording just 0.2 per cent growth - the lowest monthly gain since the end of the GFC-induced downturn.
However, the news is not all grim. The slowdown follows 16 months of strong gains, with home values still up 11.9 per cent on the previous year.
