More interest rate cuts on the agenda

The Reserve Bank released its November Statement on Monetary Policy this week and there can be no doubt that more rate cuts are on their way. The RBA slashed its growth forecast for the Australian economy to 1.5 per cent, and indicated that a major slowdown is on the cards.

The markdowns surprised the market because they were much weaker than expected and were lower than the Federal Government’s forecast of 2 per cent growth. They were even lower than the 1.8 per cent growth rate predicted by the International Monetary Fund.

The tone of the RBA’s statement was decidedly grim and indicated just how worried the Board is about the economy grinding to a halt. Governor Glenn Stevens and his team have been in overdrive over the last few months in an attempt to cushion the Australian economy from the fallout caused by the global financial meltdown. The official cash rate has been cut by more than 200 basis points since June this year, from 7.25 per cent, to its current level of 5.25 per cent.

In its statement, the RBA effectively signalled that it will do what it has to do to try and stop the Australian economy from tipping into recession. It’s certainly a difficult task ahead given that all the economic data coming out over the last two weeks is showing an ongoing deterioration in conditions.

The Board will have to keep tweaking the official cash rate lower until there are signs that the economy is starting to recover and that inflation is behaving.

“In reviewing the stance of policy each month in the period ahead, the Board will be seeking to strike the appropriate balance between avoiding an unduly sharp weakening in demand and the need for inflation to fall back to the target over a reasonable period,” the RBA said.

Some market commentators are predicting that the RBA will make a cut as large as 100 basis points at its December board meeting and that rates could be as low as 4 per cent by the middle of next year.

Source: InfoChoice