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Next rate cut could be a treat for Christmas

Georgia Wilkins Colin Brinsden Economy  Sydney Mornign Herald  21 November 2012

THE Reserve Bank has given its clearest signal yet that another interest rate cut is on the cards and economists believe it could come in time for Christmas.

Financial markets are betting on a greater than 50 per cent chance the Reserve will cut the cash rate to 3 per cent in December, following the release of the minutes from its November board meeting.

In a speech to the Committee for Economic Development of Australia on Tuesday in Melbourne, RBA governor Glenn Stevens said changes to the cash rate had not been ruled out, but it was ''prudent'' to sit still.

''The board felt that further easing might be required over time,'' he said. ''It was also conscious, though, that a significant easing of policy had already been put in place, the effects of which were still coming through and would be for a while. In addition, the latest inflation data, while not a major problem, were a bit on the high side, and the gloom internationally had lifted just a little. So it seemed prudent to sit still.''

HSBC Australia chief economist Paul Bloxham said the RBA minutes gave more forward guidance than previous statements. ''We expect another cut to the cash rate, probably before Christmas,'' he said.

The minutes again explained the reason the cash rate was left unchanged at 3.25 per cent at the November board meeting, when many economists had expected another cut. ''With prices data for the September quarter slightly higher than expected and recent information on the world economy slightly more positive, the board judged that the stance of monetary policy was appropriate for the time being,'' the minutes said.

The RBA expects underlying inflation to remain close to 2.5 per cent - the middle of its 2 per cent to 3 per cent target band - over the next two years, apart from the temporary effect of the carbon price.

Last week's release of the September quarter wage price index - the RBA's preferred measure of wage growth - showed some moderation in pressures compared with the previous three quarters.

Commonwealth Bank chief economist Michael Blythe said the RBA continued to put a strong emphasis on events in the international economy when weighing up interest rates.

Separately Mr Stevens said there were signs of a ''turning point'' in the housing market. ''One area of stronger potential demand growth is dwelling construction, which has been unusually weak,'' he said.

''At present, at least some of the preconditions one might expect to be needed for higher construction seem to be coming into place.

''Interest rates have declined, dwelling prices seem to have stopped falling, rental yields have risen, and the availability of tradespeople is assessed as having improved. We have, moreover, seen a rise in approvals to build. So there is some evidence of a turning point, albeit a belated one.''

With AAP

Last modified onTuesday, 28 May 2013 09:24

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