RBA cuts 25 to 3.5%

 

The RBA did the right thing and cut interest rates by 25 basis points to 3.5%, but in doing so, it is signaling its new-found alertness to downside risks in the economy and inflation.

The key quotes from the Statement of RBA Governor Glenn Stevens are below, with my comments in square brackets and in italics.

• Growth in the world economy picked up in the early months of 2012, having slowed in the second half of 2011. But more recent indicators suggest further weakening in Europe and some further moderation in growth in China.  [The recent indicators of moderation are the fresh concerns for the RBA – as they should be.]

• Commodity prices have declined lately, though they are mostly still high.   [Interesting use of the word “mostly”.  The broad global commodity price indices are very weak and are a sign of disinflation pressures globally.]

• Financial market sentiment has deteriorated over the past month.  [Bingo!  This is fresh news that made the rate cut inevitable.  Watch markets for more clues on where to next for the RBA.]

• Capital markets remain open to corporations and well-rated banks, but spreads have increased. [Meaning banks will not pass on the full 25 basis points and will probably face funding cost pressures in future.  This also means further rate cuts are near certain.]

• In Australia, available indicators suggest modest growth continued in the first part of 2012.  [Modest is just that, modest.  Stevens could have said “subdued”, or “moderate” either of which would be consistent with ongoing low inflation from a low starting point.]

• Both households and businesses continue to exhibit a degree of precautionary behaviour, which may continue in the near term.  [“Caution” means holding off spending, borrowing and investing.  Lower interest rates may change that cautious approach.]

• Maintaining low inflation over the longer term will require growth in domestic costs to slow as the effects of the earlier high exchange rate wane.  [This is the one hawkish part of the statement – imported prices may edge up as the AUD remains lower than it was at the start of the year.]

• Housing prices had shown some signs of stabilising around the turn of the year, but have recently declined again. [Falling house prices can move from rancid to poison very quickly… not that the RBA targets house prices but it would be worried if there were on-going large price falls.]

• At today’s meeting, the Board judged that, with modest domestic growth and a weaker and more uncertain international environment, the outlook for inflation afforded scope for a more accommodative stance of monetary policy. [There seems little doubt the RBA will need to cut some more in the months ahead.]