Rate Cut in Prospect as Economy Falters – Oct 2011

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The Reserve Bank has left its key interest rate unchanged for another month, ignoring for now the gathering signs of a slowdown in growth at home and abroad.

The dollar dived as the RBA indicated that it is prepared to cut interest rates ”to provide some support for demand,” pending fresh inflation figures for the September quarter.

For now, though, the central bank kept its cash rate at 4.75 per cent, where it’s been sitting since Melbourne Cup Day last year.

The RBA’s decision was widely expected as the central bank attempts to weigh the threat of higher inflation from a rekindled mining boom against weaker growth for much of the rest of the economy. Turmoil on financial markets – which has knocked about 15 per cent off local share values in the past three months alone – was also not enough to prompt a rate reduction.

”It will take more time for evidence of any effects of the recent European and US financial turbulence on economic activity in other regions to emerge,” RBA governor Glenn Stevens said in a statement accompanying today’s rates decision.

”Thus far, indications are that economic activity is continuing to expand in China and most of Asia,” he added, citing Australia’s main export markets.

The Australian dollar fell more than half a US cent to 94.54 US cents – the lowest in more than a year – in recent trading as Mr Stevens indicated the RBA is taking a dimmer view of Australia’s economic outlook.

”While there remain good reasons to expect solid growth over the medium term, the indications are that the pace of near-term growth is unlikely to be as strong as earlier expected, due both to local and global factors, including the financial turmoil and related effects on business confidence,” Mr Stevens said.

Rate cut in prospect

Economists zeroed-in on this comment from the RBA governor which signalled the bank’s readiness to cut interest rates if the economy slows further:

”An improved inflation outlook would increase the scope for monetary policy to provide some support to demand, should that prove necessary,” Mr Stevens said.

St George Bank chief economist Besa Deda said the central bank is suggesting rate cuts are becoming more possible.

‘‘They do seem to be weighing up whether underlying inflation is going to be as strong as previously expected,’’ she said.

“They seem to have opened the door for a possible rate cut.’’

‘‘It really seems like their rhetoric over recent meeting has changed,’’ Ms Deda added.

Singapore-based Rajiv Biswas, senior director and Asia-Pacific chief economist for IHS Global Insight, predicts the RBA will cut its cash rate as soon as next month.

‘‘The weakening external environment is a key risk factor,’’ said Mr Biswas.

Monetary policy works in very long lags, said Mr Biswas, so if the RBA sees weakness in 2012, they need to act soon to combat it.

JP Morgan economist, Helen Kevans, though, argues that the RBA has merely move to a ”more neutral stance” and isn’t about to cut rates.

“They are not particularly concerned (about inflation) given the impact of weakening global demand on inflation,” Ms Kevans said.

“We’d been expecting a rate hike later on but given the global backdrop the RBA will be inclined to hold the cash rate for an extended period,” she said.

Mixed data

The RBA’s board had to consider a slew of mixed economic data over the past month. For instance the jobless rate surprisingly increased to 5.3 per cent last month from 5.1 per cent in August.

Against that, though, mining investment continues to stoke demand in the economy – even as commodity prices slump.

Data out today also showed Australia posted its second-largest trade surplus ever – at $3.1 billion – for August. Building approvals also rose 11.4 per cent, seasonally adjusted for the month, its best monthly increase since March 2010, and an indication of improving confidence in the volatile housing construction industry.

Source: The Age – 4th October 2011

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