News and Media

8 October 20011

RBA leaves room for more rate cuts

The Reserve Bank of Australia (RBA) has left the door open for more rate cuts, after it lowered the official cash rate to 4.5% on Melbourne Cup Day.

In its November statement on monetary policy, the RBA downgraded inflation from three to 2.5% in 2012. GDP (gross domestic product) growth for 2011 was also revised down from 3.25% to 2.75%.

Westpac chief economist Bill Evans says the market is currently expecting around another 100 basis points of rate cuts and Westpac predicts a cut of another 75 basis points.

'We're pleased to note that the previous assessment of the mining-fuelled strong economy is now being revisited,' Mr Evans says.

'The critical link to the labour market has been recognised explicitly. The reason why that’s so important is that the Bank is finally linking the weak interest rate sensitive parts of the economy to the unemployment rate and with inflation expected to remain under control, largely due to the moderation in wage pressures in the non-mining sector, there’s now considerable scope for further rate cuts, as we expect those sectors to remain under pressure, despite the first (rate) cut'’

CommSec economist Savanth Sebastian predicts the next rate cut could be in February, but says any further rate cuts would be largely dependent on Europe.

'It's important to point out that the longer it takes to find a solution to the European debt crisis, the more heightened the risks are for the global economy. In addition, a further rate cut would help to shore up domestic confidence and ensure that monetary policy moves to a more neutral setting,' he says.

Reproduced in full with permission: Australian Property Investor, “RBA leaves room for more rate cuts”, 4 November 2011