Reserve Bank of Australia Likely to Cut Key Interest Rate Again on Tuesday

June 4, 2012

The main doubt about what Australia’s Monetary Board will decide is not whether or not the central bank will ease but rather the size of the cut, 25 basis points or 50 bps.  The decision is due at 04:30 GMT (00:30 on the U.S. eastern seaboard, and 14:30 local time), and would constitute the fourth reduction since last November.  That decline and a second in December were of 25 basis points apiece, but a third cut just one month ago was bumped up to 50 bps and left the Official Cash Rate at 3.75%.

There are several justifications for a further rate cut in Australia.

  • Manufacturing activity is now contracting sharply as attested by the May purchasing managers reading of 42.4 versus 43.9 in April and 49.5 in March.  As recently as February, such activity was still expanding.
  • Housing continues to be subdued.  Housing loans edged up only 0.3% in March after falling by 1.5% in January and 2.5% in February.  Building permits fell 8.7% on month in April and by a whopping 24.1% on year.
  • Consumer confidence received a smaller-than-hoped boost from last month’s 50-basis point easing and remains 2% weaker than last October.
  • The Reserve Bank of Australia’s quarterly Monetary Policy Statement revised inflation as well as growth prospects downward.
  • CPI inflation by mid-2012 will be hovering near the floor of the 2-3% target corridor.  Inflation expectations have eased.
  • Home prices were 4.5% lower than a year before in 1Q12.
  • Corporate profits fell 4.0% last quarter.
  • Growth prospects have worsened in China and other key Australian export markets.

Two counter-arguments are unlikely to dissuade officials from easing since the bottom line from them is softer growth and inflation.

  • Some decent labor market data.  The unemployment rate fell to 4.9% in April from 5.2% in March.  Employment in those two months rose by a combined 53K.
  • Aussie dollar depreciation cumulating to 12% against the U.S. currency from the 2011 peak.

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



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