Wednesday, August 7, 2013

RBA cuts cash rate to record low

The Reserve Bank of Australia has cut the official cash rate to a record low at its August board meeting, after noting the effects of a depreciating dollar, below-trend growth and recent increases in the unemployment rate.

The bank cut the rate by 25 basis points to 2.5 per cent, in line with analyst expectations.

The move will fuel barbs between the government and opposition about the extent to which the cash rate is a bellwether for the health of the economy, with Prime Minister Kevin Rudd, Opposition Leader Tony Abbott and former Prime Minister John Howard weighing into the debate.

All but one of the 13 economists surveyed by AAP expected the RBA to cut the cash rate by a quarter of a percentage point, from the already record low of 2.75 per cent.

The RBA last cut the cash rate in May, citing the high Australian dollar, which was then above parity with its American counterpart, as one of the reasons conditions remained tough for business.

Reserve Bank Governor Glenn Stevens said the Australian economy has been growing "a bit below trend" over the past year.

"This is expected to continue in the near term as the economy adjusts to lower levels of mining investment," Mr Stevens said.

"At today's meeting, and taking account of recent information on prices and activity, the Board judged that a further decline in the cash rate was appropriate."

He said the pace of borrowing has remained relatively subdued, while inflation has been consistent with the medium-term target.

"With growth in labour costs moderating, this is expected to remain the case over the next one to two years, even with the effects of the recent depreciation of the exchange rate."

Mr Stevens also noted that the Australian dollar has fallen around 15 per cent since early April, although it remains high.

Volatility in financial markets has increased globally, though conditions remain very accommodative, he said.

Financial markets are pricing in one more rate cut this year.

RBA vague on future intentions: CBA

The last time the Reserve Bank moved on interest rates during an election campaign was in 2007, when Mr Howard was prime minister, and the official cash rate was increased to 6.75 per cent.

But this is the first rate cut in an election period, according to CommSec chief economist Craig James.

"It is our belief that the economy will pick up after the election," Mr James said.

"The Reserve Bank is also waiting to see what happens post-election."

ANZ chief economist Ivan Colhoun said the statement was "probably the least dovish easing statement" he had seen.

"It's not that different in terms of the messages they've been talking about in the last few months, they're still saying they'll continue to assess the outlook and adjust policy as needed.

"Normally when they ease, they have lots of reasons why they ease but there's not that same really strong backing up of the cut in the statement."

Mr Colhoun said he would be surprised if this was the last cash rate cut.

"The indicators that tell you it's the last one such as job ads, such as unemployment, they're still heading in the wrong direction," he said.

JP Morgan economist Ben Jarman also said the RBA had not given a clear explanation for why it had decided to cut the rate.

"They've taken this action but they've not given or hung it on a particular indicator about what got them over the line," he said.

"If anything, the wording of everything is pretty terse."

JP Morgan predict the central bank will cut again, but likely not as soon as September.

"We think their drip-feed scenario that they've been going through is probably going to continue, and they'll hold off for a couple of months before going again," Mr Jarman said.

Commonwealth Bank chief economist Michael Blythe said RBA's statement was vague on its future cash rate intentions.

"They have suggested that inflation would stay within their target range, so that certainly leaves open the scope for further moves," he said.

"But you don't come away from today's comments, which are really the same as the last two meetings when they did nothing, with a strong view on where the rate is going from here."

Unions, business welcome cut

The Australian Chamber of Commerce and Industry said the move would provide relief for struggling business people.

"With the economy already weak, growth forecast to slow even further, and unemployment heading for a ten-year high, the Reserve Bank has taken the responsible course," ACCI chief executive officer Peter Anderson said.

The Australian Council of Trade Unions said the decision would be good for jobs and families.

"Families struggling with the cost of living at the moment will be able to cope just that little bit better with their mortgage repayments," ACTU president Ged Kearney said.

"Business will be able to expand, perhaps and create more jobs."

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