Tuesday, October 18, 2011

Reserve Bank signals rate cut - if inflation behaves.

By Business editor Peter Ryan - analysis
The Reserve Bank has signalled that next week’s highly anticipated consumer inflation data could be the trigger for cutting the official interest rate.
In the minutes from its September meeting, the RBA board noted that the latest data shows the pickup in underlying inflation had been “more gradual than initially indicated” suggesting the medium term outlook for inflation will be comfortably between the 2 and 3 percent target band.

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The Board indicated the case for a rate cut from the current 4.75 percent on Melbourne Cup Day was getting stronger given the subdued local economy outside of mining.
“An improved inflation outlook, if confirmed by further data, would increase the scope for monetary policy to provide some support to demand, should that prove necessary,” the Minutes said.
The mood for a rate cut has been fuelled by a recent revision to measures of underlying inflation by the Australian Bureau of Statistics (ABS) which reduces annual inflation from 2.7 percent to 2.5 percent.
Most economists agree consumer inflation data for the September quarter, to be released on October 26, will be a critical factor in the RBA’s November meeting.
The minutes also note eased financial conditions, a softening labour market and a lowering of fixed interest rates for some home loans as additional signs of an economy under pressure.
The RBA board also underscored the uncertainty on global financial markets, reflecting concerns about a possible Greek debt default and concerns about the stability of Europe’s banking system.
“Reflecting these developments, share prices of financial institutions, particularly those in Europe, had fallen significantly and had been extremely volatile.
“At one stage, the share prices of the three largest French banks had fallen by more than 30 percent in the month, to be 75-90 percent below their pre-crisis levels.”
However, the RBA remains confident about the health of the Australian banking system, despite volatility for share prices, exchange rates and bonds.
“Domestic banks remain well positioned to withstand a further period of dislocation, with deposit growth continuing to outpace lending growth.
“Australian banks continued to have good access to short term markets onshore and offshore."
However as a result of global and local conditions and low yields on bonds, markets are optimistic about an easing: “there was an expectation that the cash rate would be reduced significantly by the end of next year.”
The RBA has also confirmed the Australian consumer remains cautious, with varying economic conditions – the two speed economy – complicating the task of assessing the strength of the overall economy.
The Reserve Bank board meets on November 1, Melbourne Cup Day, a year after rates were increased to the current 4.75 percent.

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