RBA to proceed with caution

The big news this week was the release of the Reserve Bank’s minutes from its February 3 board meeting. Governor Glenn Stevens signed off on another 100 basis point cut to the official cash rate at this meeting, bringing rates to 3.25 per cent which is a 45-year low.

The minutes showed that the board’s key focus continues to be the rapid deterioration in world economic conditions which started late last year. Members noted the sharp slump in household and business confidence, slowdown in China and the IMF’s global growth forecasts which are expected to be the weakest in 60 years.

The minutes acknowledged that the latest 100 basis point cut and the government’s $42 billion stimulus plan would both have a significant impact on the economy during 2009. These comments suggest that the RBA is signalling the end of its aggressive monetary policy easing cycle which started in September last year.

The minutes noted: "This stimulus would take time to be effective and could be expected to have only a modest effect on the near-term outlook in Australia. Given the speed at which the global contraction had occurred, short-term prospects were thus still for weakness in demand and output. Nonetheless, the substantial measures taken would help to cushion the economy from the contractionary forces coming from abroad and, over time, work to establish conditions conducive to stronger demand later in the year. "

While the fiscal and monetary policy measures go to work in the domestic economy, the RBA will continue to scrutinise the data for signs that Australia is heading for serious trouble. The economy has probably deteriorated even further since the February 3 board meeting and the latest economic news from Japan suggests that Australian exporters are going to have a tough time going forward. Japan is Australia’s largest export market and the latest data shows that the country is currently experiencing the worst economic conditions for 50 years.

Market participants will be looking for clues about the RBA’s next move when Governor Glenn Stevens appears before the House of Representatives Standing Committee on Economics on Friday. A number of economists are already predicting a cut of 25 to 75 basis points when the Board meets again in March.

Infochoice.com.au