RBA slashes rates to 40-year low

There was no surprise this week as Governor Glenn Stevens slashed the official cash rate by 1 per cent. The cut was in line with market expectations and brings the official cash rate to 3.25 per cent, its lowest level in Australia since the early 1960s.

The Reserve Bank has now cut rates by a total of 400 basis points since September last year in an effort to protect the Australian economy from the worst of the global downturn. This is one of the most aggressive monetary policy easing cycles seen in Australia for many years and reflects just how concerned the central bank is about the economy’s overall outlook.

In his monetary policy statement released on Tuesday, Governor Stevens noted that the near term outlook for the global economy was the weakest in many years as a result of the global financial crisis.

"Economic conditions in Australia have also been affected, though less than in other advanced economies. Australia’s financial system remains in a strong condition and large interest rate reductions over recent months have been passed through in substantial measure to end borrowers.

Nonetheless, the combination of last year’s financial turmoil, a severe global downturn and substantial falls in commodity prices has had a significant dampening effect on confidence, and therefore on prospects for growth in demand. Inflation has begun to moderate and, given recent developments, it is likely to continue to decline," he said.

This means that the RBA is hoping to step back for a while and let its expansionary monetary policy work together with the Federal Government’s $42 billion stimulus plan do its work.

However, commentators are predicting that there’s definitely more economic pain as global economic conditions continue to worsen. Australia’s economic growth is forecast to contract by 0.7 per cent in calendar 2009. As a result, the government and RBA are likely to come under some pressure to provide more support over the next few months.

Analysts have flagged a 75 basis point cut in March, with rates likely to go as low as 2 per cent by mid year as Australia slips into recession.

Infochoice.com.au