Reserve Bank may move again in March

The Reserve Bank may be forced into further action following the rejection of the Federal government’s $42 billion stimulus plan on Thursday this week. The RBA slashed 100 basis points off the official cash rate only last week as part of its aggressive monetary policy easing cycle. The cash rate now sits at 3.25 per cent which is the fifth consecutive cut that the central bank has made since late 2008. The RBA is slashing interest rates in an attempt to protect Australia from the worst of the global economic downturn.

The RBA made the decision to cut rates by only 100 basis points in light of the Federal government’s previously announced $10.4 billion package and its recent $42 billion package. Both stimulus plans were forecast to support the economy by creating about 75,000 and 90,000 jobs, respectively.

However, unemployment figures released by the Australian Bureau of Statistics this week showed that the jobless rate rose to 4.8 per cent in January. This is the highest level since June 2006, even though the number of people in the workforce increased by 1,200. This was slightly higher than economists’ forecasts of 4.7 per cent.

According to recent surveys of business and consumer confidence the unemployment rate is expected to rise sharply over the coming few months. Some economists are predicting that it will rise to 6.5 per cent by the end of 2009 and then reach 9 per cent by the end of next year. This would put the jobless rate at its highest level since September 1994.

The reality is that no matter how uncertain Australia’s own economic outlook is at the moment, it’s highly unlikely that it’s going to be able to stay insulated from the current global recession. The International Monetary Fund has predicted that global growth will slow to just 0.5 per cent.

This means that depending on what happens with the government’s stimulus plan, the RBA will probably move again next month. Some analysts are expecting a cut of 50 basis points which would bring the official cash rate down to 2.75 per cent. However, there are questions being raised about the marginal benefits of another cut given how difficult it is to return the cash rate back to its normal level of about 5.5 per cent.

Infochoice.com.au