RBA Likely To Cut Rates Soon

Posted on September 24th, 2012 · Posted in News

Expectations on the RBA to deliver further interest rate relief have been brought forward.  It is now expected that 25 basis points will be cut from the cash rate in October and November (it was previously expected that there would be one cut in November, followed by a further cut in the first quarter of 2013).

The Australian Dollar remains high despite recent falls in commodity prices, especially iron ore and coal. The difference between the dollar & commodity prices means monetary conditions have tightened and interest rates will need to decline to offset this.  Furthermore, fiscal policy is likely to tighten further, with lower commodity prices anticipated to cause revenue growth undershooting the federal government’s May budget projections and indicators of employment growth continuing to weaken.

The minutes of the RBA Board’s September meeting, released this week, indicate that the Bank is most concerned about slowing global growth and that the high AUD may be weighing down this growth.  It is thought that a shift will occur in Australia’s drivers of growth as the economy moves from the investment phase of the mining boom to the production and export phase. This changing mix of Australia’s growth is expected to be associated with softer labour market outcomes as the exporting phase is much less labour intensive than the investment phase.

Further, falling commodity prices point to a weakening in Australia’s terms of trade. While gradual decline in the terms of trade has been forecast, risks are tilting to the downside and if they eventuate would result in a relatively drag on Australia’s national income & nominal GDP growth, with flow-on effects to employment, non-mining business profits and government revenues. Further, weaker-than-expected commodity prices would likely see a faster decline in business investment from its peak (expected in 12-18 months time). These factors point to tighter fiscal policy and looser monetary policy moving forward.