Australian Official Cash Rate Sliced to 4.25%

December 6, 2011

The OCR was cut by 25 basis points for the second consecutive month.  Fifty of a total 175 bps of tightening between October 2009 and November 2010 have now been reversed.  A statement from Governor Glenn Stevens asserts that the “inflation outlook afforded scope for a modest reduction in the cash rate. The Board will continue to set policy as needed to foster sustainable growth and low inflation over time.”  This followed reiteration of the point made when rates were first cut that CPI inflation has started to decline with prospects appearing consistent with the Bank’s 2-3% target range in 2012 and 2013.  While total consumer prices rose 3.5% between the third quarters of 2010 and 2011, the two measures of core inflation decelerated to 2.3% on the trimmed mean index and 2.6% on the weighted median gauge.  Core inflation gives a better estimate of future total inflation than the current rate of total inflation.  The Reserve Bank of Australia’s statement observes 1) Australia’s terms of trade has peaked but remains high, 2) domestic labor market conditions are somewhat softer, 3) there is considerable turbulence in world financial markets, 4) trade flows in Asia have ebbed somewhat, 5) the Aussie dollar remains historically expensive, and 6) Aussie production is running near its trendline and demand is expanding faster than trend. 

In short, the statement contains a mix of dovish and hawkish remarks.  Tellingly, the statement’s conclusion shown in bolded quotes above states the goal of sustainable growth before that of low long-term inflation, suggesting an ordering of those priorities that is different from the emphasis on inflation containment during the time when the OCR was raised seven times from 3.0% to 4.75%.  The RBA acted aggressively between September 2008 and April 2009, cutting the OCR in six moves from 7.25% to 3.0%.  In so doing, monetary officials managed to be one of very few of their counterparts in other advanced economies to avert a recession.  Once again when global economic prospects have turned dark, officials have erred on the side of promoting growth sooner, rather than delaying action until later.

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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