Reserve bank Interest rate watch – November 2011

The Reserve Bank of Australia moved to decrease the cash rate by 0.25% on 1 November 2011, a surprise decline for some economists, considering the general approach previously taken by the central bank so far this year.

I note some key points made by the bank that led to the decision to cut rates this month;

“Output in Asia has recovered from the effects of the Japanese earthquake…Trade performance, however, is starting to see some effects of a significant slowing in economic activity in Europe, where the prospects are for economic weakness to continue. Commodity prices, while still at high levels, have generally declined over recent months.”

These comments I believe are a good insight into the specific areas of concern that weigh heavily on Australia’s economic good fortune. Asian output and GDP is naturally influential since China in particular has been having the greatest positive economic effect for Australia’s terms of trade as a result of their incredible growth and urbanisation plans. This of course has underpinned the present mining boom and sheltered the rest of the economy somewhat, from more benign or contractionary conditions.

Hence any changes in output, prices and overall economic activity in China is being monitored carefully by the bank. In addition European concerns find their way (from a trade point of view) to Australia through dampened demand and therefore reduced output potentially required from Asian production, flowing through to potentially reduced raw materials required from Australia.

The observation of commodity prices is also quite relevant and influential on Australia’s current economic situation and the bank sees this as another important indicator that it monitors closely.

The bank goes on to mention a dampening effect on consumer confidence flowing through from the “European turmoil” as also something to consider, probably to a lesser extent.

And of course the most observed indicator when it comes to monetary policy management, Inflation figures – were also subdued and provided some confirmation that inflation would likely settle and possibly remain within the bank’s target range for the foreseeable future – meaning the bank felt somewhat “released” to begin to take a more neutral stance to monetary policy and cut rates, rather than continue the contractionary stance of recent times.

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