Fed: More measured rate cuts likely from RBA
By Colin Brinsden, Economics Correspondent17 Feb 2009 4:58 PM
CANBERRA, Feb 17 AAP - Economists doubt the Reserve Bank of Australia (RBA) has finished cutting the official cash rate just yet, but borrowers shouldn't rely on any more aggressive reductions.
The RBA's minutes from its February board meeting - where it cut the cash rate by another 100 basis points - indicate the central bank remains concerned about the short-term prospects for the economy.
It says its 400 basis points worth of rate cuts since September and the government's stimulus package will give a "significant" boost to the economy, but will take time to be effective.
"Given the speed at which the global contraction had occurred, short-term prospects were thus still for weakness in demand and output," the minutes said.
"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."
Macquarie Securities economist Benjamin Dinte said the RBA would be hesitant to continue lowering rates at an aggressive pace.
"(But) we do believe that further softness in global economic conditions and domestic confidence is enough to justify another reduction in rates in March," he said.
Treasurer Wayne Swan conceded the government's latest $42 billion stimulus package, which passed the parliament last week, will take time to work through the economy.
"That's what the government has said about the package and why we moved so swiftly last October and again in recent weeks," Mr Swan told reporters in Brisbane.
Economists are looking for the government's $10.4 billion stimulus package announced in October to help lift Wednesday's December quarter retail sales by 1.0 per cent after just 0.1 per cent growth in the previous three months.
New opposition treasury spokesman Joe Hockey, unsurprisingly, doesn't believe the government has got the response to the global recession right.
"It's time to be prudent, it's time to be careful, it's not a time to panic," Mr Hockey told the Fairfax Radio Network.
"You have to show confidence, you have to believe things are going to get better, you have to have a plan to get things better. I don't think the government is doing any of that."
But Mr Swan said it was the coalition that didn't understand the depth of the global recession and the type of response required.
"You've seen underscored today from the Reserve Bank minutes the need for a very substantial fiscal stimulus for our economy," he said.
Still, despite the expected boost to consumer spending, the RBA expects the December quarter gross domestic product will be "broadly flat".
"... a relatively good result in comparison with other developed economies," the minutes said.
JP Morgan Australia chief economist Stephen Walters said it was the performance of those other economies that was likely to determine the need for further interest rate cuts.
He said economic conditions among Australia's major trading partners had shown an "alarming deterioration" particularly in Japan - Australia's largest single destination for exports - where output had collapsed.
"Already, on current forecasts ... 62 per cent of Australia's export partners will be in recession in 2009, including eight of the top 10 destinations," he said.
"A pause (in rate cuts) next month is possible if economic conditions improve, but so too is a cut of more than 50 basis points, depending on how the data prints, particularly offshore."
Financial markets have fully priced in a 50 basis points cut by the RBA next month.
