Australian cashrate cut by 50 points as commodity index dips again

Published 2 May 2012

The Reserve Bank of Australia lowered its cashrate by 50 basis points to 3.75% yesterday, effective today.

The bank cut the rate to 4.25% in December after a 25-point cut the previous month. It had held the rate at 4.75% for a year before that.

Bank governor Glenn Stevens said the bank based yesterday’s decision on information over the past few months suggesting economic conditions had been somewhat weaker than expected, while inflation had moderated.

Putting the interest rate cut in context, the bank also released preliminary estimates for its commodity price index for April, which indicated that index had fallen again after a small rise in March halted a decline that began in mid-2011.

On the interest rate, Mr Stevens said: “Growth in the world economy slowed in the second half of 2011 and is likely to continue at a below-trend pace this year. A deep downturn is not occurring at this stage, however, and in fact some forecasters have recently revised upwards their global growth outlook.

“Growth in China has moderated, as was intended, and is likely to remain at a more measured & sustainable pace in the future. Conditions in other parts of Asia softened in 2011, partly due to natural disasters, but have recently shown some tentative signs of improving. Among the major countries, conditions in Europe remain very difficult, while the US continues to grow at a moderate pace.

“Commodity prices have been little changed, at levels below recent peaks but which are nonetheless still quite high. Australia’s terms of trade similarly peaked about 6 months ago, though they too remain high.

“Financial market sentiment has generally improved this year, and capital markets are supplying funding to corporations & well rated banks. At the margin, wholesale funding costs have declined over recent months, though they remain higher, relative to benchmark rates, than in mid-2011. Market sentiment remains skittish, however, and the tasks of putting European banks & sovereigns on to a sound footing for the longer term, and of improving Europe’s growth prospects, remain large. Hence Europe will remain a potential source of adverse shocks for some time yet.

“In Australia, output growth was somewhat below trend over the past year, notwithstanding that growth in domestic demand ran at its fastest pace for 4 years. Output growth was affected in part by temporary factors, but also by the persistently high exchange rate. Considerable structural change is also occurring in the economy. Labour market conditions softened during 2011, though the rate of unemployment has so far remained little changed at a low level.

“Recent data for inflation show that after a pick-up in the first half of last year, underlying inflation has declined again and was a little over 2% over the latest 4 quarters. CPI inflation has also declined, from about 3½% to a little over 1½% at the latest reading, as the weather-driven rises in food prices in the first half of last year have, as expected, now been fully reversed. Over the coming 1-2 years, and abstracting from the effects of the carbon price, inflation will probably be lower than earlier expected, but still in the 2–3% range.

“As a result of changes to monetary policy late last year, interest rates for borrowers have been close to their medium-term averages over recent months, albeit tending to increase a little as lenders passed on the higher costs of funding their books. Credit growth remains modest overall. Housing prices have shown some signs of stabilising recently, after having declined for most of 2011, but generally the housing market remains subdued. The exchange rate remains high even though the terms of trade have declined somewhat.

“Since it last changed the cash rate in December, the board has maintained the view that the setting of policy was appropriate for the time being, but that the inflation outlook would provide scope for easier monetary policy, if needed, to support demand. The accretion of evidence over recent months suggests that it is now appropriate for a further step in that direction.

In considering the appropriate size of adjustment to the cashrate at today’s meeting, the board judged it desirable that financial conditions now be easier than those which had prevailed in December. A reduction of 50 basis points in the cashrate was, in this instance, therefore judged to be necessary in order to deliver the appropriate level of borrowing rates.”

On the commodity price index, Mr Stevens said preliminary estimates for April indicated the index fell by 1.6% (on a monthly average basis) in SDR (International Monetary Fund special drawing rights) terms, after rising by 0.5% in March (revised). The largest contributors to the fall in April were decreases in the prices of coal, oil, gold & aluminium. In $A terms, the index rose by 0.4% in April.

“Over the past year, the index has fallen by 4.2% in SDR terms. Much of this fall has been due to falls in the prices of metallurgical coal, iron ore, aluminium & wheat. The index has fallen by 5.2% in $A terms over the past year.”

The SDR index peaked at 149.8 in July 2011, slipped to 136.6 in December, rose to 140 over the next 3 months then slipped to 137.8 in April. The bank also measures movements in $A & $US terms, which have shown similar shifts, though occasionally with different timing.

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Attribution: Bank releases, story written by Bob Dey for the Bob Dey Property Report.

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