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Tuesday 15 May 2012

"RBA sets scene for lower rates"

Hi Followers

I came across this article today that I want to share:

THE minutes of the latest monetary policy meeting did not explicitly flag the possibility of another round of interest rate cuts but still left the way open.   
The meeting was held by the board of the Reserve Bank of Australia (RBA) on May 1 and ended with a cut in the cash rate to 3.75 per cent from 4.25 per cent.

The minutes spelled out the reasoning behind the move - economic growth and inflation that fell short of the central bank's expectations, the lowered forecasts for both published in the RBA's quarterly report on May 4, and the ongoing risks from Europe.

The minutes show no real sign that the RBA expects those factors to go away all of a sudden.
The forecasts prepared by the RBA, like those in the federal budget last week, are based on the assumption that market expectations for the cash rate are vindicated.

As the minutes noted, those expectations were - when the meeting was held - that cash would fall to 3.25 per cent by the end of 2012.

And the forecasts are consistent with plenty of scope to cut the cash rate.

"The staff assessment was that inflation was likely to remain in the lower half of the (two to three per cent) target range over the foreseeable future, with cost pressures to be contained given the forecast for moderate growth in the economy,'' the RBA said in the minutes.

The risks from abroad are skewed downward.

The RBA said the risks from Europe continued to cloud the world economic outlook and were weighing on market sentiment, which had deteriorated.

"Members noted that the deterioration had not been triggered by any particular event but, rather, it reflected renewed concerns about the inter-related state of public finances and weakness in economic activity in the euro area,'' the RBA said.

In other words, the darker mood was soundly based on fears that fiscal consolidation would retard growth, making it harder for the affected countries to balance their budgets.

In the minutes, the RBA described this as a "negative feedback loop''.

Against this backdrop, it's clear that the RBA has not closed the door on further cuts to the cash rate.
However the minutes did not canvass the possibility explicitly.

Accordingly, the RBA will be inclined to adopt a wait-and-see approach, which has more appeal since there was an unexpected fall in the unemployment rate in April, reported by the Australian Bureau of Statistics on Thursday.

The futures market has currently factored in a cash rate of about 2.75 per cent by the end of 2012.
It's possible, but the minutes suggest that's only likely to happen if the worst fears surrounding Europe are realised.

Barring that, it will be a matter of watching the flow of data to see if the RBA's forecasts again prove to be on the sunny side of reality.
This information was gathered from:
http://www.news.com.au/money/interest-rates/rba-sets-scene-for-lower-rates/story-e6frfmn0-1226356152887

DEB BRADY
0405 570 903

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