RBA - no more rate cuts?

RBA signal that as the "very significant" rate cuts "would take time to be effective" future rate cuts would be assessed in the medium term;

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Minutes of the Monetary Policy Meeting of the Board - Sydney - 3 February 2009

Considerations for Monetary Policy

The recommendation to the Board was for a reduction in the cash rate of 100 basis points to 3.25 per cent.

The primary backdrop to members’ policy discussion this month was the marked deterioration in world economic conditions late in 2008. Members had noted at previous meetings that there had been an abrupt change to the outlook for global economic activity after September, following Lehman’s collapse and the resultant strains in financial markets and declines in asset values. This had caused a collapse of household and business confidence and a very sharp fall in global demand. The dependence of Asian economies on manufactured exports meant that they had been severely affected. Domestic demand in Asia had also weakened sharply. This included the Chinese economy, which, though still growing, had slowed markedly. These effects were becoming evident in the economic data that had recently been released. The weakness had in turn been reflected in a further significant downward revision to the IMF’s forecasts for growth in both developed and emerging economies in 2009, which was now expected to be the weakest in six decades.

Members noted that measures taken in developed economies to stabilise their financial systems had contributed to an improvement in the functioning of credit markets over the past few months. There had also been greater steadiness in commodity markets since November. The better functioning of markets plus the very significant monetary and fiscal stimulus that was being put in place in all regions would assist in promoting global recovery over time. Nonetheless, the near-term outlook was very weak.

Economic conditions in Australia were being affected by these global events, though, to date, the Australian economy had been more resilient than other industrial economies. Importantly, Australia’s financial system remained in a relatively strong condition. Among other things, this had allowed the significant monetary policy easing starting in September to flow through to large reductions in many lending rates. Nonetheless, the headwinds from the global economy were very strong and would continue to have a significant negative effect on the domestic economy in the near term.

Members noted that the package of fiscal measures to be announced by the Government later that day would result in a significant boost to demand during 2009. Even so, given the contractionary forces coming from abroad and the clear evidence that inflation was on a downward trend again, members judged that another substantial easing of monetary policy at this time was appropriate. They supported the recommendation for a cut of 100 basis points.

Members agreed that, together with earlier rate cuts, this would amount to a very significant easing of monetary policy. This had occurred relatively early in the business cycle and lending rates in many cases would soon be at generational lows.

Together with the fiscal measures, this meant that a very significant macroeconomic stimulus had been applied to the domestic economy. This stimulus would take time to be effective and could be expected to have only a modest effect on the near-term outlook in Australia. Given the speed at which the global contraction had occurred, short-term prospects were thus still for weakness in demand and output. Nonetheless, the substantial measures taken would help to cushion the economy from the contractionary forces coming from abroad and, over time, work to establish conditions conducive to stronger demand later in the year. Assessments of those medium-term prospects, as well as the course of the short-term data, would be important to future policy decisions.