Australian Reserve bank Interest rate watch – December 2012

Today the Reserve Bank of Australia made a decision to cut cash rates by 0.25% – after cutting rates in October by the same amount, and taking the total cuts to interest rates this calendar year to 1.25%.

Reasoning for the downward adjustment are remarkably similar to the comments provided as the reasoning for the October rate cut – almost identical.

The theme continues to be as follows:

Global economy
Weaker forecasts for global growth, especially in Europe and China, in the absence of a strongly growing US economy – with risks that current forecasts could still be optimistic.

Local Economy
Inflation is still close to target and little cause for short term concern. Growth is running close to trend although the two speed economy is very much alive, with mining industry spending driving growth and several other industries experiencing weakness and showing subdued signs of investment. The labour market is showing slight growth although there are signs towards increasing unemployment. Consumers were spending higher in the first half of 2012 and spending has declined since, however it is expected to rise again, albeit slowly.

Australian dollar
Recent comments suggest the Australian dollar remains stubbornly high, despite a slight decline in commodity prices and a slowing world growth outlook. The Reserve Bank would appear to expect some depreciation is coming.

Lending and passing on interest rates
The central bank notes investment in property has been subdued, although there have been some tentative signs of improvement. Capital markets remain open to corporations and well rated banks.

We note separately that banks have passed on around 115 points of the 150 point cuts the RBA has made since November 2011, giving the banks an additional margin buffer to deal with the challenges of obtaining finance for lending.

Overall: The Reserve Bank is acting to provide some demand stimulus given the current environment both locally and internationally, the high exchange rate, and the scope afforded to it whilst inflation is contained.


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