Reserve Bank of Australia Didn’t Sanction a Third Interest Rate Cut

February 7, 2012

Most analysts had assumed a third Officials Cash Rate cut this month, and they were instead faked out.  In a statement from Governor Glenn Stevens, the present 4.25% official cash rate level (OCR) after back-to-back reductions in November and December was called "appropriate," but the door was left open to further easing down the road "should demand conditions weaken materially" and thereby depress the inflation outlook.  The statement notes several developments that support its decision to pause easing: continuing quite high commodity prices and quite robust Chinese demand, a partial alleviation of acute financial pressures in Europe, the likelihood of continuing moderate U.S. expansion, Australia lending rates having fallen near to their medium-term trend, modest growth domestic credit, and near-trend Australian growth.  The inflation forecast calls for some further decline in the near term and then in-target 2-3% over the 2-year policy horizon.  Note is made that Australia’s terms of trade (export-import price ratio) has started to ebb, and a voiced concern that is being watched involves the Australian dollar, which in trade-weighted terms is tracking somewhat higher than assumed previously. 

Australia’s central bank Policy Board meets early each month with the exception of January.  The next meeting is scheduled for March 6.  A quarterly monetary policy statement will be published this Friday, and minutes of today’s meeting will be released on February 21st.  The OCR peaked cyclically in March-August 2008 at 7.25%.  In a successful attempt to avoid participating in the global Great Recession, the OCR was slashed six times by a total of 425 basis points between September 2008 and April 2009 and then held at a 49-year low of 3.0% for six months.  What ensued were seven 25-bp rate hikes administered in October, November and December 2009 and March, April, May and November of 2010.  A 4.75% high was then maintained for twelve months until the the two cuts this past November and December.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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