Australia | Mar 17 2009
By Chris Shaw
The market anticipates the Reserve Bank of Australia (RBA) still has a fair way to go in terms of cutting interest rates as it deals with the weakness in the Australian economy but as Westpac economists put it, the flexibility the reserve bank has is now adequate rather than ample given rates have already come down a long way.
This suggests to the bank the RBA will now consider the tactical implications of the timing of any further cuts. One example of this comes from the last meeting as the board decided to keep rates unchanged given the major changes in policy that has seen the cash rate come down 400 basis points (4% pt) in recent months.
ANZ Bank senior rates strategist Tony Morriss agrees with Westpac. Moriss points out the RBA minutes showed the board saw cases both for and against a rate cut in March. Given further downgrades to world growth and Australian GDP are expected Morriss suggests the implication is the bar for further easings in offical interest rates is now set at a reasonably high level.
What the lack of any change in rates last meeting does achieve is it gives the board the flexibility to continue to act as it sees fit in dealing with the downturn, Morriss noting the RBA’s easing bias has been maintained. Any further moves are likely to be incremental ones in his view, which means the lows of the current interest rate cycle might actually take longer to be reached than the market currently expects.
As an example Morriss suggests the market is currently pricing in the bottom of the cycle being reached by the middle of this year, which is also ahead of the Westpac estimate of the bottom being reached sometime in the September quarter. While Morriss continues to expect a cut of 0.25% in April he notes there will be six speeches by board members between now and the next meeting and these will guide the market in terms of what to expect.
In the view of TD Securities senior strategist Annette Beacher the decision by the RBA to hold rates steady in March in no way signalled the easing cycle is over, rather it was a pause to allow the fiscal and monetary stimulus previously applied some time to work.
Given economic data flow since the RBA meeting has been weak, Beacher continues to expect rates will bottom out at 2.0%, with scope remaining for a sizable cut of 0.5-0.75% at the April meeting depending on the quality of the economic data still to be released between now and next month’s meeting.
The key paragraph in today’s released RBA minutes, and which can be read either way, reads as follows:
“Members could see reasonable cases for both courses of action. On balance, they judged that, having made a major change to monetary policy over the preceding several meetings in anticipation of weak economic conditions, the best course for this meeting was to leave the cash rate unchanged. Members believed this would leave adequate flexibility for policy at future meetings.”