Wednesday, March 19, 2008

Australia's next rate hike might be a cut

Just like in the United States. Our Reserve Bank opens up the possibility here.

Struggling mortgagees have been presented with a glimmer of hope by the Reserve Bank whose board minutes released yesterday suggest that the next move in interest rates could be down.

The indication comes as the Treasurer Wayne Swan has warned that the turmoil engulfing US financial markets presents a “significant risk” to the Australian economy.

The board’s minutes released yesterday 14 days after the meeting in accordance with the Bank’s new rules indicate that the decision to lift rates in March was finely balanced.

They say that although “standard macroeconomic considerations” continued to suggest the need for rate hike, there was “some evidence, albeit tentative, that a slowing in private demand was starting to emerge”...

The board members were presented with staff forecasts of inflation somewhat lower than those previously made public.

After making their decision to lift the cash rate by a further 0.25 per cent to 7.25 per cent the board members described the overall tightening since the middle of 2007 as “substantial”, and said that if the private banks tightened their lending standards the effect would be even greater.

In an indication that the board members were uncertain about whether the next move on interest rates would be up or down the minutes concluded by noting that the members felt the higher rate “would leave adequate flexibility to respond as necessary” over the months ahead.

This is a sharply different form of words to that used after the February meeting, which said that the board would continue to review whether policy was “sufficiently restrictive”.

The ANZ’s chief economist Saul Eslake said that on his reading the words used by the bank conveyed “the possibility that the next movement in rates, whenever it occurs, could actually be downwards rather than inevitably being upwards” as the bank had been suggesting in its February minutes.

He said that the big slide in consumer confidence reported since the March meeting had increased the likelihood that the next move in interest rates would be a cut.

The equities economist at Commonwealth Securities Savanth Sebastian added that the likelihood of a further rate hike had also been cut by an extra fortnight of weakness in global share markets.

“Fear driven sentiment remains a common theme amongst investors, and speculation of further write downs in the US is likely to keep credit markets tight,” he said.

Commsec believed that although the Reserve Bank might not need to raise rates again one more rate hike was a possibility given inflationary expectations and an expected strength in commodity prices.

The Treasurer Wayne Swan told parliament that the deteriorating global outlook presented “a significant risk to the Australian economy”.

“There is no doubt Australia's financial system has been affected,” the Treasurer said in a Ministerial statement. “I do not want to downplay the severity of the global financial developments.”

The US Federal Reserve is expected to slash its federal funds rate by up to one complete percentage point early this morning Australian time, leaving the rate as low as 2 per cent.

On Monday in an emergency decision the Fed cut its so- called discount rate by one quarter of a percentage point and agreed to back JP Morgan’s takeover of the troubled Bear Stearns investment bank for less than one tenth of its previous price.

Wayne Swan said he was “in almost-daily discussion” about events in the US with the Reserve Bank and other Australian authorities and business leaders.

The outlook was “beyond our control, but we are vigilant”.

3 comments:

The Weatherman said...

I thought it was a bit on the hawkish side. The RBA went out of its way to question the value of the consumer confidence index. Also, their conclusion was "On balance, members concluded that a further 25 basis point rise in the cash rate was necessary to restrain demand, in order to reduce inflation over time".

Has anything changed in terms of demand and inflation?

djm said...

The other question is whether banks would chase rates down as far and as fast as they chased them up. Having secured over-headline rate increases on the way up, it seems likely that they will try to make under-headline decreases as rates start to fall.

Anonymous said...

of course it wil be a cut next year,

Business surveys are showing a slowing, consumer confidence levels will mean negative real retailsales at some stage this year, leading indicator is showing a slowing and the bak's lack of capital means a lot less lending.

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