Preview of Australian Cash Rate Decision

May 4, 2009

It’s a closer call than generally realized whether the central bank cuts the cash rate by 25 basis points to 2.75% or leaves such at 3.0%. I give a marginal edge, but only that, to the street consensus of no change and would consider such to be a pause in easing, not the end of the line.

The consensus rests mostly on the upbeat tone of minutes from the April meeting of the Reserve Bank of Australia Board.  These were released on April 21st but reflect thinking as of April 7th.  The minutes explicitly indicate that the Board considered not cutting rates in April but instead opted for a reduction of 25 basis points.  No policy change had occurred in March, so officials clearly have throttled back their speed of incremental support after having reduced rates by 100 bps in October, 75 bps in November, 100 bps in December, and 100 bps in February.  In all, 425 basis points of relief have been administered since early September, reducing the cash rate from 7.25% to 3.0%, its lowest level since March 1960.  The minutes from the April meeting revised down projected economic growth and predict a continuing drop in medium-term inflation expectations.  Those negatives are balanced in the minutes against some perceptible improvement in global financial markets, the substantial amount of both monetary and fiscal policy stimulus in Australia’s pipeline, the historically low Australian rates, and expected recovery of Australian demand beginning near end-2009.  The minutes left open the possibility of more rate cuts but called the scope for such “modest.”  The qualifying adjective “modest” is usually incompatible with easing at consecutive meetings in central bank-speak.

If all necessary information for today’s rate decision, which will be announced at 04:30 GMT on Tuesday, had been available in early April, there would be no need to meet again now.  Several key pieces of news could support consideration of another rate cut now, however.

  • March labor statistics were much weaker than assumed.  Jobs fell by 34.7K, and full-time workers declined 54.8K during the first quarter, a 2.8% annualized rate of decline.  The jobless rate increased to 5.7% in March from 5.2% in February and 4.5% in December, and it should reach 6% in April.
  • Inflation is decelerating incredibly fast after previously being resilient.  PPI inflation fell to 4.0% in 1Q from 6.4% on year in 4Q08.  CPI inflation was 2.5% last quarter, down from 3.7% in 4Q08 and 5.0% in 3Q.  A monthly TD-MI consumer price inflation gauge fell to 2.1% in April from 2.6%.
  • While most countries reported a higher PMI score, Australia’s factory-sector PMI stumbled badly to a record low of 30.1 in April from 33.2 in March. 
  • Motor vehicle sales dropped 22.6% in the year to March. A 2.2% 1Q drop in home prices might unsettle a nascent improvement in consumer confidence.
  • The Reserve Bank of New Zealand cut its own cash rate by 50 basis points further last week to 2.5%.  That Bank’s cyclical peak rate had been 8.25%, 100 basis points higher than Australia’s, and the RBNZ justified its latest action in part by citing a strengthening kiwi and higher long-term rates, factors that resonate also in Australia.

I give an edge to no change in Australian rates because of the upcoming annual budget in that economy on May 12th, where a third fiscal stimulus package seems likely.  Fiscal support so far totals A$ 52 billion, including both infrastructure expenditures and tax relief for households.  With markets not expecting a rate cut in May but pricing in some further reductions later this year, RBA officials are unlikely to jolt investor psychology by holding their ground this month and probably would prefer to let another fiscal shoe fall before acting themselves.

Copyright 2009 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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