Monday, December 3, 2012

RBA tipped to deliver early Christmas present

By Business editor Peter Ryan
The Reserve Bank appears likely to deliver an early Christmas present when it holds its final meeting of the year tomorrow.

Most economists think the RBA board will cut the cash rate to 3.0 per cent as a buffer against shrinking commodity prices and a slowing economy.

Financial markets are factoring in an 80 per cent likelihood of a rate cut tomorrow and 19 of the 28 economists polled by the Bloomberg wire service agree.

A 0.25 percentage point cut would take the cash rate to 3.0 percent - the lowest level since April 2009 at the height of the global financial crisis in the wake of the Lehman Brothers collapse.

The RBA board defied predictions of a rate cut last month on Melbourne Cup day when the cash rate was left on hold at 3.25 per cent.

However, most economists believe the RBA has now had time to assess the impact of 1.25 percentage points in cuts since November last year and will see a lower cash rate as critical given falling commodity prices and slowing economic growth.

The RBA has been managing expectations about the longevity of the mining boom in recent months and recently warned that the resources boom will peak earlier than expected.

With the mining phase slowly depleting, the RBA needs to lower rates to ensure that other areas such as business investment, housing construction and retail spending fill the growth gap.

At the same time, the RBA will be monitoring the attitude of cautious consumers who continue to pay down debt rather than spend in the pre-Christmas period.

In its most recent statement on monetary policy, the RBA downgraded its outlook for the Australian economy and put growth as "a little weaker" at just below 2.75 percent in the year to June 2013.

That view is expected to be confirmed in Wednesday's national accounts from the Australian Bureau of Statistics where growth of 0.6 percent is expected in the September quarter and 3.2 percent over the year.

While that growth would be the envy of US and Eurozone economies, it signals a weaker growth outlook for Australia and another reason for a lower cash rate.