Tuesday, 27 March 2012

RBA to Deliver the February Interest Rate Cut in April

The February interest rate cut will likely be announced next week, on Tuesday 3 April.   Arguably, the RBA should be cutting rates again next week (that is, taking the cash rate to 3.75%), but it would be too much to expect the non-staff on the Board to be swayed to take what now would be an aggressive move.  It is likely to take the cash rate below 4% in the months ahead.

The on-going sub-trend rate of economic growth, low inflation, moderate wages increases, confirmation the Budget will lock in a contractionary period for government demand and the ongoing strong and overvalued Australian dollar should see the interest rate cut delivered.

The papers and recommendation for monetary policy for the RBA Board meeting are close to the sign off stage at Martin Place.

Since the March RBA Board meeting, the data flow has confirmed that GDP undershot the RBA’s already downgraded forecast by around ½%, employment fell again, consumer and business confidence remained weak and asset prices are pretty flat.

In addition, the global environment remains problematic – in the last few weeks, China has revised down its growth target and further eased policy and Europe remains in recession, but this has probably been partly offset by better economic news out of the US and reasonably calm market conditions.

An interest rate cut next week will hardly ignite inflation pressures – but it will provide a small kick-along for growth and confidence.

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