The Reserve Bank of Australia (RBA) has shown some Christmas spirit, with a second consecutive cash rate cut coming just in time for the festive season.
The RBA cut the official cash rate on 6 December by 0.25 per cent, bringing the official rate down to 4.25 per cent.
The central bank shocked the nation in November, when it reduced the cash rate from 4.75 per cent to 4.5 per cent on Melbourne Cup Day – the first reduction in more than two and a half years and a stark contrast to 2010’s Melbourne Cup Day rate rise upset.
Benign inflationary growth, slow employment growth and poor consumer confidence all contributed to the November rate cut and with similar conditions persisting into December, many economists were not surprised that the RBA moved downward once again. “The rate cut should not come as a surprise from a housing market perspective, considering that the soft market conditions that first became evident in June of last year
have created no inflationary pressures and have persisted,” commented RP Data’s Cameron Kusher. “In fact, capital city home values are down four per cent from their December 2010 peak and rental rates have increased by just 4.6 per cent over the 12 months to September 2011.”
In addition to flagging the soft property market conditions, the RBA noted in its monetary policy statement that growth in the global economy has moderated in 2011.
Europe’s sovereign debt and banking problems are also “likely to weigh on economic activity there over the period ahead”, the statement said. With more difficult financial market conditions ahead and both businesses and households remaining cautious, “the likelihood of a further material slowing in global growth has increased”, the RBA said.
The November and December rate cuts might actually be a taste of things to come, with many economists predicting another reduction on 7 February 2012 (with no RBA Board
meeting scheduled for January).
National Australia Bank chief economist Alan Oster said the outlook for global growth is bound to be worse when the Board meets in February, providing good grounds to bring the cash rate down to four per cent. A cut could be delayed for a month or two – or not happen at all – if the local economy holds up. Alternatively, an economic meltdown in the eurozone could see an out-of-cycle emergency reduction.
