By Wayne Cole
SYDNEY (Reuters) - Australia's central bank opened the door wide for a rate cut in May even as it held rates steady at 4.25 percent at a review on Tuesday, saying it wanted to see coming inflation data before deciding whether to ease policy.
The Australian dollar slipped as the Reserve Bank of Australia (RBA) sounded a more cautious note on the economy, acknowledging that growth had disappointed.
"The Board judged the pace of output growth to be somewhat lower than earlier estimated, but also thought it prudent to see forthcoming key data on prices to reassess its outlook for inflation, before considering a further step to ease monetary policy," said RBA Governor Glenn Stevens in a short statement.
The steady outcome had been expected by all the economists polled by Reuters, but many felt the statement showed a clearer easing bias, conditional only on inflation proving tame.
The key consumer price report for the first quarter is due on April 24 and is generally expected to show underlying inflation remained comfortably within the RBA's long-term target band of 2 to 3 percent.
"The tone was definitely dovish," said Matthew Johnson, a senior economist at UBS. "A cut in May looks pretty likely based on the fact we don't see all that much inflation pressure in the economy."
"They have downgraded their domestic growth outlook. Their view on the economy has changed."
The market seems to agree, with interbank futures implying a near-100 percent probability of a cut in May.
Such a move would be a relief for the Labor government which is slumping in the polls but still set to deliver a tough budget on May 8, a week after the central bank's next policy meeting.
Indeed, the aggressive fiscal tightening needed to get the budget back into surplus in 2012/13 as promised is sure to be a drag on economic growth and another argument for easier monetary policy.
The RBA had previously singled out unemployment as the pivotal indicator for policy, with only a sustained increase in jobless warranting a cut from here.
Australia's jobless rate has hovered around 5.2 percent for months now, putting it well below the United States' 8.3 percent and half that of the euro zone.
Global rates: http://link.reuters.com/xyb96s
For retail sales: http://link.reuters.com/kuq85s
Household savings: http://link.reuters.com/bet47s
Business investment: http://link.reuters.com/vyb96s
ARGUMENTS FOR, AND AGAINST
Pressure for an easing has come from sectors hit by a high Australian dollar, such as manufacturing and tourism, while consumer caution has crimped retailers and sapped demand for credit.
Government data earlier on Tuesday showed retail sales rose a miserly 0.2 percent in February to A$21 billion, short of already modest forecasts for a 0.3 percent increase.
Sales were up just 2.6 percent on February last year, a long way from the growth pulse of 5 to 6 percent retailers enjoyed for much of the last decade.
Local banks, aiming to recoup higher funding costs, have also nudged up mortgage rates independently of any move by the RBA and effectively tightened conditions.
Yet the resource sector continues to enjoy a once-in-a-century boom as demand from China and India fuels massive investment in mines and liquefied natural gas.
The sums are staggering, with the value of projects under way or planned well north of A$400 billion and set to run for several more years.
The central bank also remain confident Beijing will engineer a soft landing for its economy, which is Australia's biggest export market and a major driver of global commodity prices.
(Reporting by Wayne Cole; Editing by John Mair)