Bad news prompted RBA April cut
April 21, 2009
The Reserve Bank of Australia cut interest rates earlier this month after it realised the outlook for economic growth was even worse than expected.
In the minutes of the April 7 board meeting, released on Tuesday, the RBA acknowledged the economic slowdown had probably met the conventional benchmark for recession - two consecutive quarters of declining gross domestic product (GDP).
'The latest set of indicators suggested that GDP was likely to have fallen again in the March quarter,' the RBA said in the minutes.
GDP fell in the by 0.5 per cent in real, seasonally adjusted terms, in the December quarter, according to estimates released by the Australian Bureau of Statistics in March.
The minutes acknowledge that the forecast before by the board on April 7 was bleaker than the outlook underpinning the quarterly statement on monetary policy on February 6, and confirmed that a further deterioration in the labour market was likely.
'Further falls in employment and rises in unemployment were expected,' it said.
The central bank tried to look on the bright side, noting some improvement in sentiment in the local credit market, while a better mood among international investors had been reflected in a higher Australian dollar and stronger share markets.
And the fiscal and monetary stimulus already in the pipeline was expected to have a beneficial effect.
This meant the board had to consider whether to give the economy another boost with a further easing in monetary policy, even though the effects of the earlier stimulus were yet to percolate through the economy.
'In discussing this question, members noted that there had already been a major easing in both monetary and fiscal policy in Australia in the past six months,' the minutes record.
These measures, the RBA said, 'would support demand and help to foster economic recovery in due course.
'Nonetheless, the effect of recent international and domestic information had been that the near-term outlook for demand and output in Australia was now weaker than expected, though a recovery in demand was likely towards the end of the year.'
The RBA said this increased the likelihood of a fall in inflation over the medium term.
'As such, members saw scope for a modest reduction in the cash rate,' the minutes said.
The cut, which became effective the following day, on April 8, brought the cash rate to a 49-year low of 3.00 per cent, although the major lenders only passed part of that on to customers.
There was nothing in the minutes to suggest any more rate cuts are being actively considered, but nothing, either, to rule out that possibility.
The RBA clearly believes it may now have done all it can to get the economy going again, but equally it clearly would be willing to change its mind if the economic growth data continued to come in below expectations.
Sky News
