Expecting Another Australian Rate Cut of At Least 100 Basis Points

February 2, 2009

At 03:30 GMT on Tuesday, the Reserve Bank of Australian will unveil its fifth rate reduction in five months.  The cash rate peaked at 7.25% but will sink to a near 50-year low of 3.25% or below.  There were previous cuts of 100 basis points in December and October, 75 bps in November and 25 bps in September.  January is the one month each year when no policy meeting is held, so it’s been two months since Australian policymakers last assessed the economy.  Conditions are much worse, and the central bank’s statement, like that from New Zealand last week, will speak of a markedly worse global and local economic outlook with a weaker terms of trade, poor export prospects, and tighter credit conditions for businesses and households.  New Zealand’s rate peak occurred at 8.25%, and 475 bps of relief has been implemented in Australia’s neighbor and fellow commodity-rich economy since July.  Australian share prices are at a five-year low, and private credit recorded a monthly decline in December for the first time since 1992.  Motor vehicle sales are more than 15% weaker than a year ago, and consumer confidence has deteriorated substantially.  Construction is floundering, and the manufacturing PMI was in the 30’s in each of the past three reported months.  Skilled job vacancies are off around 45% from a year ago, and job ads are down about 10%.  Unemployment remains comparatively low at 4.5% but will be rising more sharply in coming months.

Receding inflation removes counter-arguments from a decision to reduce rates sharply again.  The Reserve Bank of Australia was one of many central banks that gave top priority to reducing inflation for too long.  Consumer prices went up 3.7% in the year to 4Q08, down from 5.0% between 3Q07 and 3Q08.  The official statement may indicate that CPI inflation could be under 2.5% before mid-year and well below the target ceiling.  Markets are priced for a cash rate of about 2.5% next month.  A sub-2% cash rate before this crisis is over looks possible.

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



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