Reserve bank Interest rate watch – December 2011

The Reserve Bank of Australia decreased the cash rate again, and for only the second time this year – on the back of November’s rate cut of the same margin, 0.25%.

One cut is an adjustment. Two cuts in succession is a confirmed policy shift.

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

Similar to November’s comment about Asia, this month:
“Trade in Asia is now.. seeing some effects of a significant slowing in economic activity in Europe.”

The European situation figures heavily, where the Reserve Bank’s refers to sovereign credit and banking problems being responsible and weighing on economic activity over the period ahead, and means the likelihood of a further ‘material slowing’ in global growth has increased.

and commodity prices..
“Commodity prices have reflected this, declining further over recent months and taking pressure off CPI inflation rates.” I notice there is no mention of “still high” commodity prices this month.

These comments I believe are a good insight into the specific areas of concern that weigh heavily on Australia’s economic good fortune, as indicated in last month’s blog post. Asian output and GDP and commodity prices are the barometer for world economic growth it seems, according to the RBA.

This month the bank tips that Australia’s terms of trade “have peaked”. What does this mean? It suggests investment in the mining industry is picking up strongly as a result, with much more to come.

The Bank observes the high dollar and “changed behaviour by households” has had a dampening effect on the local economy.

Inflation figures were again tipped to be within the Bank’s target range in 2012 and 2013. Hence, in order to sustain growth within a low inflation-forecasted environment (since current actual inflation is still above the target range) the bank saw an opportunity to allow another cut in rates. To me, this signals greater concerns about global economic changes and finance restrictions rather than local demand or inflationary concerns.

The Bank notes interest rates for lending, in the mortgage market, are now at the average level of the past 15 years.

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