Reserve Bank of Australia

March 2, 2009

For the first time in several months, analysts had been somewhat split over whether the RBA will cut its cash rate again this month.  I expect another rate reduction.  The decision will be revealed at 03:30 GMT tonight (22:30 EST and 14:30 AEDT Tuesday).  The central bank previously cut the benchmark by 400 basis points in five steps to 3.25%.  Three of those cuts (last month, December and October) were reductions of 100 basis points, and November’s move was by 75 basis points.  The first move last September was a cut of 25 basis points and done before the Lehman fiasco. The Australian dollar shows no change from its time just before the February rate cut but has depreciated 7.8% since the first rate cut in September.

Split opinions had mirrored a more mixed bag of data relative to expectations, but I’m pretty confident that officials will sanction further easing in light of some alarming new figures released today.  The factory PMI slumped to 31.7 in February from 36.6 in January, and a 1.9% decline of inventories last quarter is expected to lop at least a percentage point from GDP growth, ensuring that such contracted.  The latest readings for exports, imports, building permits, consumer confidence, motor vehicle sales and house prices were also negative. Labor market data were better than assumed, however, with full-time workers rising 81.4K between November and January and the jobless rate holding below 5%.  Private credit surprising grew 0.6% in January, and a 3.8% jump of retail sales in the latest reported month was perhaps the biggest upside surprise of all.

The central bank’s latest quarterly Monetary Policy Statement released last month cut forecasts for growth to 0.5% this year, core CPI to 3.5% by mid-2009 but not to in-target territory until mid-2010, and total CPI to 1.75% by the middle of this year.  The report’s tone was comparatively optimistic, asserting that Australia’s outlook is better than those in most other economies in part because of substantial fiscal and monetary support.  Nevertheless, the report left the door open for additional rate cuts.  A cut tonight of more than 50 basis points is unlikely, but a decision to leave a 3.25% key rate seems even more doubtful.

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



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