Australian cashrate cut again on low inflation risk

Published 5 June 2012

The Reserve Bank of Australia cut its cashrate by 25 basis points to 3.5% today – the fourth cut since last October.

The decision followed a week of worsening economic news across the Tasman – in the housing sector, sales volume fell below 400,000/year for the first time since 1997, housing approvals started falling a year ago and slipped below 145,000/year in March and the 5-year moving average of housing finance commitments is down to the level of 10 years ago.

The Australian central bank raised its rate by 25 points to 4.75% in November 2010, then started cutting a year later. It took 25 points off twice at the end of 2011 and 50 more last month.

Bank governor Glenn Stevens gave his reasons for the latest cut today: “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. Conditions in other parts of Asia have largely recovered from the effects of last year’s natural disasters, but the ongoing trend is unclear and could be dampened by slower Chinese growth. The US continues to grow at a moderate pace. Commodity prices have declined lately, though they are mostly still high. Australia’s terms of trade similarly peaked about 6 months ago, though they remain historically high.

“Financial market sentiment has deteriorated over the past month. The board has noted previously that Europe would remain a potential source of adverse shocks. Europe’s economic & financial prospects have again been clouded by weakening growth, heightened political uncertainty and concerns about fiscal sustainability & the strength of some banks. Capital markets remain open to corporations & well rated banks, but spreads have increased. Long-term interest rates faced by highly rated sovereigns, including Australia, have fallen to exceptionally low levels. Share markets have declined.

“In Australia, available indicators suggest modest growth continued in the first part of 2012, with significant variation across sectors. Overall labour market conditions firmed a little, notwithstanding job shedding in some industries, and the rate of unemployment remains low. Nonetheless, both households & businesses continue to exhibit a degree of precautionary behaviour, which may continue in the near term.

“There have been no new data for inflation since the previous meeting. Over the coming 1-2 years, and abstracting from the effects of the carbon price, inflation is expected to be in the 2–3% range. In the near term, it is likely to be in the lower part of that range, though 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.

“As a result of earlier changes to monetary policy, interest rates for borrowers have declined to be a little below their medium-term averages. Business credit has increased more strongly in recent months, though credit growth remains modest overall. Housing prices had shown some signs of stabilising around the turn of the year, but have recently declined again. Generally, the housing market remains subdued. The exchange rate has declined over recent weeks, reflecting lower commodity prices, heightened risk aversion and expectations of lower interest rates.

“At today’s meeting, the board judged that, with modest domestic growth and a weaker & more uncertain international environment, the outlook for inflation afforded scope for a more accommodative stance of monetary policy.”

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

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