Australia | Dec 06 2011
By Greg Peel
The RBA today cut its cash rate by 25 basis points to 4.25%, following on from a similar cut in November.
Reading the governor's statement, there is little in the text that indicates much change from the November statement except that which specifically deals with Europe.
In November, the statement noted: “Financial markets have recovered somewhat from the turmoil of recent months, helped by stronger economic data in the United States and by signs that European governments are making progress in their efforts to deal with the sovereign debt and banking problems.”
The RBA nevertheless decided that as inflationary pressures had eased at home, and given we weren't quite out of the woods with Europe yet, there was scope to pull monetary policy back from a “slightly restrictive” to a “more neutral” stance with a cut to 4.5%.
This month however, the statement suggests: “The sovereign credit and banking problems in Europe, to which European governments are still seeking to craft a full response, are likely to weigh on economic activity there over the period ahead. Financial markets have experienced considerable turbulence, and financing conditions have become much more difficult, especially in Europe.”
And that's it in a nutshell. The RBA board again acknowledged that Australian households continue to be spooked by goings on in Europe and are likely to remain spooked until true resolution is clear. The board also made it clear that Asia is experiencing the ongoing impact of weaker demand out of Europe. Having moved in November only back to a neutral stance, the board rather briefly indicated this month that “the inflation outlook afforded scope for a modest reduction” in the cash rate.
At the end of the day, it was difficult to see the RBA not cutting its rate in the wake of the coordinated central bank liquidity injection announced last week. The RBA is wary of being too slow to react, and the ghosts of Lehman and the sudden 100 point cut the RBA was forced to make in response must wander the corridors at Martin Place. The ECB is also expected to cut this week, perhaps by 50 basis points, and many an economist is predicting the Fed will be forced to introduce QE3 next year.
In such a climate, it seems wiser for the RBA to ease down as a precautionary measure when it has the room to move rather than be forced to make dramatic changes down the track, albeit we all hope that won't be necessary.
Read the full statement here.
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