Australian Reserve Bank Interest rate watch – October 2012

After cutting rates so far this calendar year by 75 basis points (0.75%) in May and June, the board decided to reduce the cash rate in October by 25 basis points to 3.25 per cent, bringing the calendar year cuts to a total 1 percent.

Weaker forecasts for global growth, especially in Europe and China, with further risk anticipated to be on the downside according to the RBA, is being observed and acting as the key driver of the rate decision.

Locally, inflation is close to target and growth is running close to trend. Although the labour market in Australia shows some moderate growth and unemployment remains low, the RBA does see some softening indicators in recent months, however the bank does not appear concerned about unemployment.

The peak in resource investment is expected to occur next year, according to the Reserve bank, with the bank also observing very large increases in capital spending in the resources sector leading up to this meeting.

The Australian dollar makes a brief appearance in comments this month, and the reserve bank appears to show surprise the dollar remains resiliently high, despite a slight decline in commodity prices and a slowing world growth outlook.

From a lending point of view the bank notes Australian banks do have access to capital, and capital markets remain open to corporations and well rated banks. There is no mention of lending to small business. The central bank notes investment in property has remained subdued, though there have been some tentative signs of improvement.

This announcement seemed to surprise the market, being ahead of time compared to rates changing traditionally in November. This may leave some pundits divided over what will happen in November, although we expect no change.


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