RBA keeps rates on hold
The Reserve Bank chose to keep rates at 3.25 per cent when it met for its monthly board meeting yesterday. With cuts of 400 basis points since September last year, this is the first time in six months that the RBA has decided to sit tight and keep monetary policy on hold.
According to RBA governor Glenn Stevens’s statement on monetary policy, the Bank chose to leave rates unchanged because it needs to see how the economy reacts to the federal government’s stimulus measures and the previous cycle of rate cuts.
Stevens said: In Australia, demand has not weakened as much as in other countries and, on the basis of currently available information, the Australian economy has not experienced the sort of large contraction seen elsewhere. The Australian financial system remains strong and the monetary policy transmission process is working to deliver large reductions in interest rates to end borrowers…Together with the substantial fiscal initiatives, the cumulative decline in interest rates will provide significant support to domestic demand over the period ahead.”
The RBA’s decision on Tuesday to leave rates unchanged was announced the day before Australia’s December quarter national account figures were released. Gross domestic product fell by 0.5 per cent in the last three months of 2008, the first slump in growth in eight years. Most economists seem less optimistic than the RBA and are predicting another contraction in the economy for the March quarter. Two consecutive quarters of negative growth will mean that Australia is officially in a recession.
While the central bank has kept its powder dry on this occasion, it’s very unlikely that it has reached the end of its easing cycle. The employment outlook in Australia is likely to weaken further and commentators are predicting unemployment will go as high as 5.5 per cent by mid year. The current reporting season is looking less than promising and conditions in Europe and the United States are looking uglier by the day. Plus, the predicted 30 per cent slump in global commodity prices will have dire implications for Australia’s national income. Eight of Australia’s top 10 export markets are already reported to be in recession.
Even if the Rudd government announces more spending measures to stimulate the economy, the reality is that Australia’s resilience to rapidly deteriorating global demand can only last for so long.
As a result, market pundits are predicting that the RBA will be forced to make more cuts when it meets again in April. Rates are expected to go as low as 2.25 per cent over the next six months as the global economic downturn continues to unfold.
Infochoice.com.au