Wednesday, October 05, 2011

What an about-face. The Reserve is about to cut rates.

Don't doubt it

The Reserve Bank board is all but set to cut interest rates at its next meeting Melbourne Cup Tuesday.

Members who met in Sydney yesterday felt the economy was weak enough to justify an immediate cut. They held off wanting to be sure they could ‘tell a credible story’ about inflation.

The next inflation figures are due on October 26, six days before the Melbourne Cup day meeting. The Bureau of Statistics has revised down the previous underlying rate from 2.7 to 2.5 per cent. It has cut the quarterly rate from 0.9 to 0.7 per cent.

The Bank believes weak international and domestic conditions have cut inflation further in the past three months. Businesses taking part in its liaison program have told it they are no longer as concerned about wage pressure. Some have told it they now expect lower wage growth this year than last.

In a statement released after the meeting Reserve Bank governor Glenn Stevens said “taking into account all the recent information, the path for inflation may now be more consistent with the two to three per cent target in 2012 and 2013, abstracting from the impact of the carbon pricing scheme”.

A low inflation story will allow the Bank to cut its cash rate by 0.25 percentage points in November and perhaps by a further 0.25 points in December from what it regards as its present mildly restrictive level of 4.75 per cent to something more neutral...

A cut of 0.50 points would bring down a typical standard variable mortgage rate from 7.8 to 7.3 per cent, slicing around one hundred dollars off the monthly cost of servicing a $300,000 mortgage. A cut of 0.25 points would slice $49 from the monthly cost of meeting a $300,000 mortgage.

Futures trading late yesterday was pricing in three interest rate cuts of 0.25 per cent by December. The Australian dollar dropped to a one-year low 94.65 cents.

“I think that the Bank has gone from thinking that things were too strong a couple of months ago, to being around trend now,” said UBS interest rate strategist Matthew Johnson.‘‘If there’s a further deteriorating, they’ll ease.”

Published in today's SMH and Age

Related Posts

. September reserve. Rate hikes pushed out.

. August Koukoulas - Why the RBA should cut, now

. What Westpac said in July: Rates down 100 points