Caution has finally gripped the Reserve Bank of Australia (RBA) Board which decided today to reduce the cash rate by 25 basis points to 3.0 per cent. This rate change is effective 5 December 2012.
Glenn Stevens, RBA Governor: Monetary Policy Decison, stated that a number of key concerns were behind the decision, particularly lower global growth forecasts, the European situation and uncertainty over the course of US fiscal policy.
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The Board indicated that it's wider economic concerns were weighted against data that suggest that “the US economy is recording moderate growth and that growth in China has stabilised. Around Asia generally, growth has been dampened by the more moderate Chinese expansion and the weakness in Europe.”
However, in his statement, Mr Stevens indicated that “commodity prices for Australia remain significantly lower than earlier in the year, though trends have been more mixed over the past few months. The terms of trade have declined by about 15 per cent since the peak, to a level that is still historically high.“
Interestingly the RBA also concedes that their data confirms that the peak in resource investment is approaching. While private consumption spending is expected to grow, the RBA now feels that a return to the very strong growth of some years ago is unlikely.
A key concern flagged by the RBA is that the near-term outlook for non-residential building investment, and investment generally outside the resources sector, remains relatively subdued. In addition, public spending is forecast to be constrained.
While the RBA believes that there are indications of a prospective improvement in dwelling investment, the Housing Industry Association (HIA), indicates that signs of a recovery in residential construction are tentative at best and quite narrowly based. “Two interest rate cuts this quarter (October and now December) improve the prospects of a tangible recovery emerging in 2013 for both new home building and renovations activity,” said HIA Chief Economist, Dr Harley Dale.
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Cost of living issues, including the price on carbon, have weighted heavily on the Boards decision. The Board stated that “Inflation is consistent with the medium-term target, with underlying measures at around 2½ per cent. The introduction of the carbon price affected consumer prices in the September quarter, and there could be some further small effects over the next couple of quarters.”
The board has reported that they believe that inflation is set to rise above 3% however general weakness in the wider economy should offset increased labour costs.
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The RBA statement reflects that caution is required, “the Board judged at today's meeting that a further easing in the stance of monetary policy was appropriate now. This will help to foster sustainable growth in demand and inflation outcomes consistent with the target over time.”
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