RBA Lowers Official Cash Rate - expect another 25bps at least in June!

At its meeting today, the Board decided to lower the cash rate by 50 basis points to 3.75 per cent

Before diving into the article, the key phrases that lept out for me and point to their concerns and the reason we can expect more loosening are;

• Softening Labour Market conditions = unemployment concerns
• Considerable structural change in the economy =  banks lending policies have changed, its harder to borrow and they needed to incentivise the banks to lend...
• Credit growth remains moderate = going from a nation of borrowers to savers has taken much of the demand out of the cycle and the RBA new a 25bp decrease wouldn't be passed on.
• Stabilsing house prices =  the bank is now happier, they can see the commercial bank balance sheets a stronger, bad debt provisions have lessened, but on the demand side, confidence needed a boost!
• ...Considering the appropriate size of adjustment...50 basis points in the cash rate was, in this instance, therefore judged to be necessary = they new any less would be ineffectual and with rates sitting
•  ...interest rates for borrowers have been close to their medium-term averages over recent months = means, with rates rising in this economic environment, demand will continue to contract, the economy needs stimulus - not only to encourage borrowing, but free up household discretionary spending too!  

 Expect at least, another 25bps in June

 

Statement by Glenn Stevens, Governor Monetary Policy RBA.

This decision is based on information received over the past few months that suggests that economic conditions have been somewhat weaker than expected, while inflation has moderated. 

Growth in the world economy slowed in the second half of 2011, and is likely to continue at a below-trend pace this year. A deep downturn is not occurring at this stage, however, and in fact some forecasters have recently revised upwards their global growth outlook. Growth in China has moderated, as was intended, and is likely to remain at a more measured and sustainable pace in the future. Conditions in other parts of Asia softened in 2011, partly due to natural disasters, but have recently shown some tentative signs of improving. Among the major countries, conditions in Europe remain very difficult, while the United States continues to grow at a moderate pace. Commodity prices have been little changed, at levels below recent peaks but which are nonetheless still quite high. Australia's terms of trade similarly peaked about six months ago, though they too remain high. 

Financial market sentiment has generally improved this year, and capital markets are supplying funding to corporations and well-rated banks. At the margin, wholesale funding costs have declined over recent months, though they remain higher, relative to benchmark rates, than in mid 2011. Market sentiment remains skittish, however, and the tasks of putting European banks and sovereigns onto a sound footing for the longer term, and of improving Europe's growth prospects, remain large. Hence Europe will remain a potential source of adverse shocks for some time yet.

In Australia, output growth was somewhat below trend over the past year, notwithstanding that growth in domestic demand ran at its fastest pace for four years. Output growth was affected in part by temporary factors, but also by the persistently high exchange rate. Considerable structural change is also occurring in the economy. Labour market conditions softened during 2011, though the rate of unemployment has so far remained little changed at a low level. 

Recent data for inflation show that after a pick up in the first half of last year, underlying inflation has declined again, and was a little over 2 per cent over the latest four quarters. CPI inflation has also declined, from about 3½ per cent to a little over 1½ per cent at the latest reading, as the weather-driven rises in food prices in the first half of last year have, as expected, now been fully reversed. Over the coming one to two years, and abstracting from the effects of the carbon price, inflation will probably be lower than earlier expected, but still in the 2-3 per cent range.

As a result of changes to monetary policy late last year, interest rates for borrowers have been close to their medium-term averages over recent months, albeit tending to increase a little as lenders passed on the higher costs of funding their books. Credit growth remains modest overall. Housing prices have shown some signs of stabilising recently, after having declined for most of 2011, but generally the housing market remains subdued. The exchange rate remains high even though the terms of trade have declined somewhat. 

Since it last changed the cash rate in December, the Board has maintained the view that the setting of policy was appropriate for the time being, but that the inflation outlook would provide scope for easier monetary policy, if needed, to support demand. The accretion of evidence over recent months suggests that it is now appropriate for a further step in that direction.

In considering the appropriate size of adjustment to the cash rate at today's meeting, the Board judged it desirable that financial conditions now be easier than those which had prevailed in December. A reduction of 50 basis points in the cash rate was, in this instance, therefore judged to be necessary in order to deliver the appropriate level of borrowing rates.