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RBA leaves door ajar for another rate cut

Reported by AAP
Tuesday, February 21, 2012
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Commonwealth Bank Of Australia.
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The central bank has left room for another interest rate cut but only if global conditions worsen, economists say.

The Reserve Bank of Australia (RBA) pointed to an improved global outlook as the main reason for its decision to keep rates on hold this month, as outlined in the minutes of its February meeting released on Tuesday.

The RBA elected to keep the cash rate at 4.25 per cent at its meeting on February 7 after previous cuts by 25 basis points in November and December.

The central bank's rationale for further possible rate cuts came amid separate comments, also on Tuesday, by RBA governor Glenn Stevens who said that funding costs for the banks had fallen but by not as much as official rates.

The comments come a week or so after widespread public furore at the decision by the four major banks to raise rates independently of the RBA.

"I think the facts are that since late last year the cash rate has come down 50 points and the cost of funding the books hasn't come down quite that much," Mr Stevens told a panel discussion at a business function in Sydney.

Mr Stevens - together with other RBA representatives - had previously pointed out the gap between the cash rate and banks' funding costs.

French bank Societe Generale said on Tuesday that funding costs for local banks were falling despite their protests to the contrary.

JP Morgan Australia chief economist Stephen Walters said the publication of the minutes indicated that the RBA board had kept official rates on hold because it was satisfied the Australian economy would continue to grow at around trend.

He also said the RBA appeared satisfied inflation would remain within its annual target range of two to three per cent.

Mr Walters said the RBA had left the door open for another rate cut if the fallout from Europe's sovereign debt crisis worsened or China's economy slowed.

"They are certainly arguing that if policy is going to change, (rates) are more likely to go down than up," he said.

"(But) any further move is conditional on something going wrong and for now that's not their base case."

In its minutes, the RBA explained that stabilising conditions in Europe and stronger data from the US and China had provided a more encouraging global outlook.

However, any weakening of demand in Australia would provide the main impetus for further cash rate cuts.

Commonwealth Bank senior economist John Peters said the central bank still had a bias towards dropping rates despite its no-move decision in February.

"The RBA indicated that if more rate cuts were needed as a result of weaker demand conditions, the relatively benign inflation outlook would not be a hurdle to further such policy easing," Mr Peters said.

He said the February board minutes confirm that euro zone's debt problems were still the major downside risk for global and domestic growth.

The RBA also noted that the European outlook had brightened in recent months.

Mr Peters said the Commonwealth Bank was expecting another quarter percentage point rate cut by the RBA in the next few months, most probably May.

25/11/2014 08:17Sydney, Australia. 25 November,2014
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