Reserve Bank of Australia Sees Scope for Further Rate Cuts

Strategic Insights -

The Reserve Bank of Australia (RBA) sees scope to cut interest rates further if needed, with domestic economic growth expected to fall in 2009 due to a global economic downturn. RBA deputy governor Ric Battellino said Australia was better placed to ride a revival in the global economy, with some positive signs in recent economic data from the US. The RBA has already cut the cash rate to a 45-year low of 3.25% between last September and February, and markets are pricing a further cut when the board meets next.

Key Takeaways:

  • The RBA sees scope to cut interest rates further if needed to cushion the economy from a possible recession.
  • Domestic economic growth is expected to fall in 2009 due to a global economic downturn.
  • Australia was better placed to ride a revival in the global economy, with some positive signs in recent economic data from the US.
  • The RBA has already cut the cash rate to a 45-year low of 3.25% between last September and February.
  • Debt futures markets are pricing the RBA to cut the cash rate by 25 basis points to three per cent when its board meets next on April 7.
  • The Australian economy had entered the global economic downturn in September 2008 in "much better shape" than many other countries.
  • China is a factor in a turnaround of the global economy and is important to Australia's fortunes.
  • The 90-day arrears rate on housing loans was 0.5%, well below the level in the UK and US.
  • A reduction of eight per cent on average in loan repayments would allow borrowers breathing space if they encountered difficulties.
  • The US economy is starting to show some positive signs, with the odd positive economic indicator in the run of US monthly data.

Statistics:

  • The cash rate fell from 7.25% to 3.25% between September 2008 and February 2009.
  • Debt futures markets are pricing a 25 basis point cut in the cash rate to three per cent.
  • The Australian economy shrunk 0.5% in the December quarter, the first contraction in eight years.
  • The budget balances of governments across Australia have swung from a surplus of 1.5% in 2008 to an estimated deficit of 2.5% this year.

Sources:

  • "RBA believes there is scope to cut interest rates if circumstances require," Asia Pulse, 31 March.
  • "RBA deputy governor Ric Battellino spoke at the Urban Development Institute of Australia National Congress 2009 in Brisbane on Tuesday."
  • AAP, "RBA deputy governor says Australia is well placed to ride out global downturn," 31 March 2009.