Reserve Bank set to go as low as 2 per cent

The Reserve Bank will be forced to go into action sooner rather than later as the outlook for the Australian economy continues to worsen. A study by a major bank out this week showed that the economy contracted by 5.1 per cent during February, slipping further from its 4.8 per cent contraction reported in January. The survey highlights the expected rate of economic activity in Australia over the next three to nine months.

According to commentators, this is the most severe monthly contraction Australia has experienced in nearly 27 years. The February figure is well below the long-term trend of 2.9 per cent growth.

Governor Glenn Stevens and his team at the central bank are not going to be happy about this kind of data. Combined with the bleak jobs figures out recently, it shows that Australia is at real risk of slipping into a protracted and nasty recession. Technically, we only need to record two consecutive quarters of negative economic growth to be in recession.

At the bank’s last board meeting, the board voted to cut the official cash rate by 25 basis points, bringing rates down to just 3 per cent. Since the RBA began its aggressive easing of monetary policy in September last year, rates have been cut by 425 basis points. The official cash rate now sits at a 49-year low.

All this grim news means that the bank is set to be under even more pressure to cut rates again as conditions around the world and in Australia continue to deteriorate. Economists are predicting that Australian and global GDP are likely to fall by 1 per cent this year.

As a result, many economists are forecasting that the official cash rate will go as low as 2 per cent by late 2009. Pundits are expecting that the RBA will sit tight at its May meeting in a few weeks’ time. It is expected to make more cuts in the second half of the year when the bank has a clearer picture of the extent to which the fiscal and monetary interventions implemented to date are protecting the economy. Given the uncertainty ahead, the Reserve Bank’s next few moves will play a critical role in steering us safely through the current downturn.

Infochoice.com.au