23 May 2013 RBA signals more rate cuts coming

Another round of interest rate cuts later this year remains on the agenda after the Reserve Bank clearly signalled it retains an "easing bias'' despite this month slashing the cash rate to a record low, economists said.

In a break from tradition, the May rate cut of 0.25 per cent to 2.75 per cent seems to have been aimed more at boosting confidence in the business sector by driving down the Australian dollar, rather than boosting consumer spending.

The minutes from the central bank's May board meeting released yesterday show that with a "surprisingly low'' inflation reading, which was expected to keep it within its target range of 2 to 3 per cent for the next few years, more cuts are a real possibility.

The futures market is already pricing in another cut to official rates in September or October, being the last in this cycle, with the RBA tipped to start lifting them again towards the back end of 2014. But Westpac chief economist Bill Evans said he remained "confident'' that interest rates would drop to a low of 2 per cent in this cycle as the global economy hit another speed bump over the coming months.But the prospect of a back-to-back cut in June is up in the air after the recent plunge of the Australian dollar back below parity, he said.

This month's cut has seen official interest rates drop from a peak of 4.75 per cent.

That represents a reduction of an amazing two percentage points - since November 2011. The board minutes released yesterday highlight the central banks' concerns that conditions in the business sector "remained below average''.

That was despite signs the household sector had begun to respond to the run of rate cuts.

"The board decided that some of that scope to ease policy should be used at this meeting,'' the RBA said.

"It judged that a further reduction in the cash rate was appropriate to encourage sustainable growth in the economy.''

The RBA was also growing weary of the high Australian dollar, according to the minutes.
But JP Morgan chief economist Stephen Walters said the decision to cut was a close one.

"Given that the Australian dollar has since fallen more than 3 per cent in trade weighted terms, board members probably are giving each other high-fives,'' he said.

"The aim of the surprise rate cut was to offset some of its impact on struggling trade-exposed parts of the economy.''

Reproduced in full with permission: News Limited Network  RBA signals more rate cuts coming  22 May 2013

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