Statement by Glenn Stevens, Governor: Monetary Policy Decision
At its meeting today, the Board decided to lower the cash rate by 50 basis points to 3.75 per cent, effective 2 May 2012. This decision is based on information received over the past few months that suggests that economic conditions have been somewhat weaker than expected, while inflation has moderated.
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 and 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 United States 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 six months ago, though they too remain high.
Financial market sentiment has generally improved this year, and capital markets are supplying funding to corporations and 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 and sovereigns onto 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 four 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 per cent over the latest four quarters. CPI inflation has also declined, from about 3½ per cent to a little over 1½ per cent 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 one to two years, and abstracting from the effects of the carbon price, inflation will probably be lower than earlier expected, but still in the 2–3 per cent 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 cash rate 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 cash rate was, in this instance, therefore judged to be necessary in order to deliver the appropriate level of borrowing rates.
Wow, they're panicking... their macro-economic narrative from 2010-12 has proven to be hopeless optimistic, so now its out with the big guns!
I'll be very interested to see what this does to the housing market. If it doesnt bring about a pretty dramatic improvement. I'd say the patient is no longer responding to the medicine!
Now all eyes are on the banks. How much will they pass on? My guess is not much, if any. The RBA has panicked. If anything, this will make house prices crash even faster when people wake up to the fact the banks aren't passing it on and the Reserve has lost control of the economy. It's all downhill from here.
Today’s surprise reduction, the first by the RBA this year, is the biggest since February 2009 and reflects the bank’s concern that the economy needs an extra shot in the arm.
Attention will now shift to the commercial banks as borrowers - and depositors - wait to see how much the lenders cut interest rates, and how soon.
The RBA’s surprise move will come as a mixed blessing for Treasurer Wayne Swan as he puts the final touches to next week’s federal budget. While Mr Swan will welcome the cut and the potential for easing the financial squeeze for households with mortgages, the size of the reduction implies the economy is weaker than the central bank had predicted - which in turn means a smaller tax take for the government.
If passed on in full by the banks, a 50 basis-point cut will save about $96 a month for mortgage holders on a typical 25-year, $300,000 home loan.
The dollar immediately shed half a US cent to drop to about $US1.035 on the decision as the lower Australian interest rates cut its lure for investors.
Today’s cut leaves the RBA’s cash rate at its lowest since December 2009 when the economy was recovering from the initial impact of the GFC. The RBA raised rates seven times from October 2009 before changing course last November with the first of two cuts to round out 2011.
Looks like the Baptist and his godsquad have finally been rolled by the real-life board members led by the recently appointed Heather Riley. It took a while for her to take charge, I was expecting this action 3 months ago.
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