Reserve's Feb-fast after a decadent December

There has been a continuing, if civilised, debate between economists about whether or not the Reserve Bank overdid the rate-cutting last year that will be fuelled further by today's decision to leave rates untouched and the discernibly more positive context around that decision.

It is, of course, easy to argue with hindsight that the December cut of 25 basis points might have been a touch unnecessary. At the time, however, there had been a slew of weak economic statistics, commodity prices had tumbled, the US was approaching the fiscal cliff, China was struggling for stability and Europe was still a source of concern.

Since then, commodity prices have roared back (which may be seasonal), China's growth has clearly stabilised, the US has postponed its fiscal crunch, Europe is still intact and fears about its fate have subsided.

Financial markets, inundated with liquidity, are in risk-on mode, with clear impacts on asset prices. Sharemarkets have bounced up and risk-premiums on both equities and debt have shrunk, helping to generate a rotation out of fixed interest securities and bank deposits into higher-returning asset classes.

Moreover, it appears that the accumulation of last year's rate cuts are starting to have an impact. Housing prices have firmed and there appears to be modest growth in consumption.

While there's no expectations that either the global economy or the domestic settings are on the cusp of anything but modest growth, and despite the Reserve Bank believing that growth this year is likely to be a little below trend, the safe decision for the bank to make was to leave rates unchanged at their historically low levels and preserve its reduced firepower.

While there are a number of prominent economists who are now predicting that the rate-cutting cycle has ended and the Reserve Bank will shift into rate-raising mode later this year the investment boom in resources is peaking and the non-resource side of the economy remains weak. The dollar remains stubbornly strong, which continues to do damage across the economy, and consumers and business remain in defence mode.

While it is conceivable that the lagged effects of the succession of rate cuts last year will flow through more significantly as the year unfolds this is not just an election year but one with the longest election campaign in the country's history.

Elections tend to dampen activity and this one, with both major parties needing to make major adjustments to spending and/or taxes to fund big-ticket promises, could be expected to have an even more stifling effect than normal.

Globally, China might have stabilised its growth rate at quite solid levels but the US has yet to address its structural challenges and the eurozone, despite receding fears of an imminent implosion, has done very little to respond to the fissures in its economic and political structures.

The likelihood that central banks in the US, Europe and Japan will keep pumping liquidity into their economies and the global financial system for some time to come may keep the Australian dollar at uncomfortably high levels even as the investment boom subsides.

It was interesting that the dollar fell quite sharply in response to the decision and the statement from Reserve Bank Governor Glenn Stevens that accompanied it.

Stevens did say that the board would continue to assess the outlook and "adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the target over time".

The currency market response suggests it interpreted that comment as the bank signalling its willingness to resume rate-cutting, although it could just as easily mean the opposite.

The trend in rates will inevitably hinge on the direction of activity within the non-resource sectors and whether some of those tentative signs of recovery in housing and other asset markets are sustained as the protracted and inevitably torrid election campaign gets properly underway, with the global conditions, currently in an uneasy calm, a continuing source of potential threat.