Agribusiness

When will the RBA move on interest rates?

Beef Central, 24/11/2011

Comment – by Neil Burgess, senior analyst, Westpac Agribusiness


Westpac Agribusiness senior analyst, Neil BurgessOn November 1, the Reserve Bank of Australia delivered a rate cut to the overnight cash rate of 25 basis points.

The market had been expecting this cut to arrive, as the economic indicators had been pointing to an easing in official interest rates.

With the release of the RBA Board meeting minutes, a clearer picture emerged as to their thinking that led to the rate cut and provided some indication as to their forward thinking surrounding further rate adjustments.

For the rate cut in November, the RBA view was that: "The case for an easing in policy was that there had clearly been material change as to the recent course of, and outlook for, underlying inflation over recent months, while the downside risks for the global economy had increased."

Its comments were based on the following domestic factors:

  • Weak credit growth
  • House prices have experienced a fall of 3-4pc over the year
  • The Australian dollar remains persistently above parity against the US dollar
  • A sudden slow-down in inflationary pressures
  • Consumer confidence described as "below average"
  • Business confidence "still well below average"

Of course, there is one other elephant in the room, and that is the issue of Europe and the current economic and financial strain.

It is expected that the prevailing economic conditions in Europe will continue to deteriorate, indeed the RBA indicated, "The risks to the global economy still seen to lie predominantly on the downside".

Not only are there issues with the financial strength of a number of EU members, but additionally, the OECD growth forecasts indicate that the Euro area is set to see a fall in growth from 2pc to 0.3pc in 2012.

With all the weaker economic data and activity prevailing, the view is that another rate cut is inevitable, but the question remains – when?

There is some anticipation in the market that the next rate cut will be December 6, however the Westpac view is that the RBA will hold-fire and the next cut will be in February, 2012. That short delay would allow the RBA to confirm that the slow-down in inflationary pressures was continuing, and to further assess the volatility of the financial situation in the EU.

In the next few weeks the picture will start to become clear and this should provide a more definitive picture for the RBA. It is acknowledged that should the financial situation deteriorate more rapidly, then the circumstances for a rate cut in December can be justified.

It's a case of "Watch this space."   

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