RBA to take a breather until February

The Reserve Bank released the minutes from its December board meeting this week. The minutes provided further insight into the board’s decision to cut rates by another 100 basis points, bringing the official cash rate down to 4.25 per cent.

The minutes said: "…a reduction of 100 basis points was appropriate and would contribute to supporting confidence among households and businesses…The Board saw a need for the reduction in the cash rate, and bank lending rates, to be large enough to have a noticeable effect on financing decisions of lenders and borrowers."

The board’s decision was based on an assessment of global economic conditions and the latest data on Australian household, housing and business sectors, commodity prices, the labour market, and prices and wages. In particular, the minutes noted the faster than expected economic slowdown in China, falling world equity markets and further deterioration in the US housing and job markets.

Monetary policy has now officially been switched from neutral to a clear expansionary setting. This change in strategy coincides with the Federal Government’s $10.4 billion stimulus package which is designed to help prevent Australia from slipping into recession. The RBA has moved aggressively over the last three months to try and shield the Australian economy from the global economic downturn. It has cut the official cash rate by 300 basis points since September.

The minutes signalled that the RBA is going to wait until its February 3 board meeting before cutting the official cash rate again. There was some speculation that the board may call an emergency meeting in January in order to ease monetary policy further. While it’s not out of the question that a January meeting could take place, it would take a major macroeconomic or material event for this to happen.

Market commentators are predicting that the RBA will have to keep cutting cut rates during 2009 as the global economy continues to deteriorate and the resources boom slowly cools down. The market is predicting a February cut of 100 basis points which would take the cash rate to a record low of 3.25 per cent.

Infochoice.com.au