Australian Central Bank Preview

April 6, 2009

The Reserve Bank paused at its March policy meeting but is likely to cut rates Tuesday by 25-50 basis points.  The central bank’s cash rate target had been cut at each of the five successive meetings from 7.25% at end-August to a 45-year low of 3.25% at the February 3rd meeting.  Three of the cuts — those in October, December and February —  were reductions of a full percentage points.  Minutes from the meeting in March indicated a close decision between cutting the rate again or taking a wait-and-see approach to better assess the impact of prior stimulus.  The minutes claimed the latter choice left officials with more flexibility to ease if needed in the future.  Pausing could also have been justified by the bigger-than-expected fiscal stimulus that was also unveiled on February 3rd.  The combined value of two stimulus packages thus far is A$ 49 billion, and a third stimulus is expected to be folded into the May 12th budget.

When Reserve Bank officials last reduced rates in February, they still expected positive economic growth in 2009, albeit of just 0.5%.  They no longer believe that a contraction will be avoided.  Retail sales, down 2.0% between January and February, was much weaker than expected. Business sentiment has slumped to its lowest reading since mid-1992.  Full-time workers dropped 66K during the three months to February, and the unemployment rate of 5.2% is near to a four-year high.  Such is heading substantially higher, as job ads dropped 23% between December and March.  Australia did experience a quarter of negative growth in 4Q08 for the time in eight years.  The service sector PSI in February had a much more depressed reading of 32.2 than January’s 41.0, and the industrial trends survey had its lowest reading last quarter since 1991.  Building approvals fell 25.5% in the year to February.

The RBA’s decision will be announced on its website at 03:30 GMT Tuesday (23:30 EDT in the United States tonight).  The pause in March caught analysts by surprise, who like now were looking for a reduction of 25-50 bps.  Later last month on the 11th, the Reserve Bank of New Zealand, whose rate tightening cycle crested 100 basis points higher than in Australia at 8.25%, implemented another 50-basis point cut to 3.0%.  New Zealand’s additional easing and several Aussie indicators that were weaker than forecast reinforced a view that Australian monetary authorities were probably ill-advised to pause when they did.  A forward-looking gauge of CPI inflation released today suggests that such will be within the central bank’s 2-3% target range this year, removing another impediment to resumed rate cutting now.

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



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