RBA chose "expansionary setting" in slashing rates 100 bps

Tuesday 16th December 2008

The Reserve Bank of Australia chose an "expansionary setting" in cutting the overnight cash rate to a six-year low this month, minutes of its board meeting show.

"Although the Australian economy had been more resilient that other industrial economies, recent data indicated that a significant moderation in demand and activity had been occurring," according to the minutes of the Dec. 2 meeting, posted on the RBA website.

"Members agreed that it was appropriate to shift monetary policy from its current roughly neutral position to one that was clearly expansionary."

The RBA lowered its forecast for headline inflation to 2.5% by mid-2009 from a previous estimate of 3% and said the deterioration in household wealth was larger, charting an 11% decline in calendar 2008. Government figures today showed builders comments work on 11% fewer houses in the third quarter than in the second, the biggest decline in eight years.

"The board saw a need for the reduction in the cash rate, and bank lending rates, to be large enough to have a noticeable effect on financing decisions of lenders and borrowers," the minutes said.

The central bank is going to focus on the deteriorating world economy and with more bad news expected on global growth, "there is no reason to believe that the bank expects it has completed its task," said Bill Evans, chief economist at Westpac Institutional Bank.

Now that the level of interest rates is deemed by the RBA to be expansionary, further rates cuts "can be smaller," Evans said. He expects at least 150 basis points more between February and June next year.

The Australian dollar traded at 66.91 U.S. cents recently, up from 66.75 cents before the minutes were released.

By Jonathan Underhill

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