RBA Cuts Rates

08 Dec 2011 - Staff Reporter from http://rebonline.com.au

The RBA has cut the official cash rate for the second consecutive month, dropping the rate by 25 basis points to 4.25 per cent.

Last month the Reserve Bank cut the cash rate from 4.75 per cent to 4.5 per cent.

"Growth in the global economy has moderated this year after a strong performance in 2010," Glenn Stevens, RBA governor, said today in a statement.

"Trade in Asia is now...seeing some effects of a significant slowing in economic activity in Europe.

"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.

"This, together with precautionary behaviour by firms and households, means that the likelihood of a further material slowing in global growth has increased. Commodity prices have reflected this, declining further over recent months and taking pressure off CPI inflation rates.

"CPI inflation on a year-ended basis remained above the target at the latest reading, due to the effects of weather events last summer, but is now starting to decline as production of key crops recovers," he continued.

"Moreover, with labour market conditions now softer, the likelihood of a significant acceleration in labour costs outside the resources and related sectors in the near term has lessened. Accordingly, the Bank's current judgement is that inflation is likely to be consistent with the 2–3 per cent target in 2012 and 2013, abstracting from the impact of the carbon pricing scheme."

The Board's decision to cut rates for the second month in December failed to surprise economists, with most forecasting another rate cut.

RP Data's Cameron Kusher said he was not surprised by the rate cut, particularly given everything that has been happening in the housing market.

"The rate cut should not come as a surprise from a housing market perspective, considering the soft market conditions that first became evident in June of last year have created no inflationary pressures and have persisted," he said.

"In fact, capital city home values are down four per cent from their December 2010 peak and rental rates have increased by just 4.6 per cent over the 12 months to September.

"The successive improvements to debt servicing positions borne through the two interest rate cuts over the last two months will be a welcome improvement to anyone with a mortgage.

"The primary benefit from the rate cut is likely to be seen in a continued improvement in consumer sentiment which should lead to an uplift in housing transaction volumes which are currently tracking about 10 per cent below the five year average nationally."

The Real Estate Institute of Queensland (REIQ) said this latest rate adjustment "must be passed on in its entirety by all lenders and must be followed up by further Reserve Bank action in the New Year."

“With the federal government’s continued determination to record a budget surplus now dependent on spending cuts, only the Reserve Bank remains capable of stimulating spending and restoring some confidence to the market,” REIQ managing director Dan Molloy said.

The RBA Board now breaks for a month, with the next Board meeting scheduled for February.