Economy

RBA tipped to pause before cutting rates again

May 6, 2009

Economists say the Reserve Bank is likely to leave rates on hold for the next few months before cutting them again later in the year.

RBA Governor Glenn Stevens said yesterday that the economy remains weak, but that initial signs of recovery fuelled by economic stimulus would be apparent in the coming months.

Katie Dean, senior economist at ANZ, said that the decision means the RBA is now “comfortable” and will continue holding rates for the next few months.

“In particular the RBA was particularly keen to highlight that the impact of earlier stimulatory monetary and fiscal policy changes are ‘yet to be observed’,” she said in a statement.

“There is nothing in the statement to contradict the view from last month’s board meeting minutes, which stated that ‘a recovery in demand was likely towards the end of the year’.”

Dean predicted that while the RBA will keep rates on hold for now, future meetings will see the official interest rate slashed again to a trough of 2%.

“We think this case for further cuts will be made in the second half of this year, as the economy remains weaker than current RBA expectations,” she said.

“In particular, we think it will be very difficult, no matter what the global economy is doing, for the RBA to ignore rapidly rising unemployment.”

Westpac chief economist Bill Evans said in a statement that the RBA has observed “tentative signs of stabilisation in several countries”, but that extensive recovery has yet to come.

“Consequently, we are comfortable to maintain our view that there will be further rate cuts over the course of 2009, although we expect that the bank will choose to extend the pause to June before moving more aggressively later in the year,” he said.

“We expect that a more aggressive move will more than proportionally increase the impact of monetary policy on economic activity.”

Stevens also said yesterday that growth in labour costs will also fall, along with inflation, and that monetary policy has “eased significantly”.

“Market and mortgage rates are at very low levels by historical standards, and business loan rates are below average, reducing debt-servicing burdens considerably. Much of the effect of these changes is yet to be observed.”

The RBA has slashed rates from 7.25% to 3% since September 2008 to help boost the deteriorating economy.

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