Australia | Feb 03 2009
By Greg Peel
25, 100, 75, 100, 100. So have gone the basis point rate cuts since the Reserve Bank’s cash rate peak in March last year. That rate lasted until September, when the RBA decided that at 7.25% perhaps it had gone just that one step too far. It cut to 7.00% just before the world fell apart.
It had taken over seven years of economic boom to see the cash rate hit its peak following the previous December 2001 trough of 4.25%. It took just four months of economic bust to return. There was no rate meeting in January, so another two months has seen a fall to 3.25% – the lowest Australian cash rate in four decades.
Mind you, it still looks like a lot against the US rate of zero to a quarter of a percent.
Nevertheless, the RBA maintains the belief that we’re not as badly off from the global meltdown as some others. “Economic conditions in Australia have also been affected,” said Glenn Stevens in his accompanying statement, “though less than in other advanced economies”. But nor does it mean we’ve come off lightly. “The combination of last year’s financial turmoil, a severe global downturn and substantial falls in commodity prices has had a significant dampening effect on confidence, and therefore on prospects for growth in demand”.
Hence the 100 points.
The February statement is peppered with strong words. Late 2008 saw “significant deterioration”, said Stevens. The “turmoil” has caused a “significant” fall in demand. Major economies “contracted sharply” The Chinese economy has “slowed markedly”. The global downturn is “severe”. But most emphatically:
“The near-term outlook for the global economy is the weakest for many years”.
While Stevens is expecting the global push to lower cash rates and to provide fiscal stimuli will ultimately achieve a recovery over time, that time could be a while yet. In December’s statement Stevens noted that the fall to 4.25% took it to the previous cyclical low point (Dec, 01). Yet this month the RBA had no qualms in affecting another “sizeable” cut. This puts all of the RBA board in fresh monetary policy territory. The board took today’s second government stimulus package announcement into consideration before making its move.
“The combination of expansionary monetary and fiscal policies now in place,” said Stevens in his final line, “will help to cushion the Australian economy from the contractionary forces coming from abroad”.
Hmmm. What happened to “The board will continue to monitor developments and make adjustments as needed to promote sustainable growth etc etc,” which ended all statements for the last however long? Is this it? Has Stevens declared 3.25% the new historical low?
Given the alarmist wording of the statement it would be brave to suggest as much. We are now in new territory, and one presumes anything can happen from here. Predictions of a cash rate at 2% some time mid-year are already cropping up.