RBA cuts interest rates by 25 basis points for December

December 4, 2012, 2:30 pmYahoo!7

The Reserve Bank of Australia has dropped the Grinch's outfit to spread some Christmas cheer by cutting the key interest rates by 25 basis points to 3 per cent.


The Reserve Bank of Australia has dropped the Grinch's outfit to spread some Christmas cheer by cutting the key interest rates by 25 basis points to 3 per cent -- the lowest level since April 2009, at the height of the global financial crisis.

In its last Board meeting for the year today, the central bank heeded the appeals from struggling retailers after figures released by the Australian Bureau of Statistics (ABS) showed retail spending remained stagnant in October.

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Official figures also showed consumers were planning to keep their wallets and purses firmly shut during the Christmas season, prompting RBA to ease rates.

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Rising unemployment, falling resource investment, weaker economic growth and a high dollar were all factors weighing on the RBA.

However, borrowers are not likely to see much relief, with the Australian Bankers Association warning that banks are unlikely to match any move by the central bank.

Governor's statement

At its meeting today, the Board decided to reduce the cash rate by 25 basis points to 3.0 per cent, effective 5 December 2012.

Global growth is forecast to be a little below average for a time. Risks to the outlook are still seen to be on the downside, largely as a result of the situation in Europe, though the uncertainty over the course of US fiscal policy is also weighing on sentiment at present.

Recent data suggest that the US economy is recording moderate growth and that growth in China has stabilised. Around Asia generally, growth has been dampened by the more moderate Chinese expansion and the weakness in Europe.

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Key commodity prices for Australia remain significantly lower than earlier in the year, though trends have been more mixed over the past few months. The terms of trade have declined by about 15 per cent since the peak, to a level that is still historically high.

Sentiment in financial markets remains better than it was in mid year, in response to signs of progress in addressing Europe's financial problems, though Europe is likely to remain a source of instability for some time. Long-term interest rates faced by highly rated sovereigns, including Australia, remain at exceptionally low levels.

Capital markets remain open to corporations and well-rated banks, and Australian banks have had no difficulty accessing funding, including on an unsecured basis. Borrowing conditions for large corporations are similarly attractive and share prices have risen since mid year.

In Australia, most indicators available for this meeting suggest that growth has been running close to trend over the past year, led by very large increases in capital spending in the resources sector, while some other sectors have experienced weaker conditions.

Looking ahead, recent data confirm that the peak in resource investment is approaching. As it does, there will be more scope for some other areas of demand to strengthen.

Private consumption spending is expected to grow, but a return to the very strong growth of some years ago is unlikely.

Available information suggests that the near-term outlook for non-residential building investment, and investment generally outside the resources sector, remains relatively subdued. Public spending is forecast to be constrained.

On the other hand, there are indications of a prospective improvement in dwelling investment, with dwelling prices moving a little higher, rental yields increasing and building approvals having turned up.

Inflation is consistent with the medium-term target, with underlying measures at around 2.5 per cent.

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Kochie: What the rate cut means for you

The introduction of the carbon price affected consumer prices in the September quarter, and there could be some further small effects over the next couple of quarters. Partly as a result of that, headline CPI inflation will rise above 3 per cent briefly. Looking further ahead, with the labour market softening somewhat and unemployment edging higher, conditions are working to contain pressure on labour costs.

A continuation of moderate wage outcomes and improved productivity performance will be needed to keep inflation low, since the effects on prices of the earlier exchange rate appreciation are now waning. The Bank's assessment remains that inflation will be consistent with the target over the next one to two years.

Over the past year, monetary policy has become more accommodative. There are signs of easier conditions starting to have some of the expected effects, though the exchange rate remains higher than might have been expected, given the observed decline in export prices and the weaker global outlook.

While the full effects of earlier measures are yet to be observed, the Board judged at today's meeting that a further easing in the stance of monetary policy was appropriate now. This will help to foster sustainable growth in demand and inflation outcomes consistent with the target over time.

Bank under fire

The RBA has cut the cash rate by 1.5 percentage points since November 2011 but it kept it on hold at 3.25 per cent in November, inviting criticism.

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Some economists believe the central bank has moved too slowly to stimulate a weakening economy.

Market Economics managing director and former Gillard government advisor Stephen Koukoulas took to Twitter to criticise the central bank and call for a larger than normal rate cut on Tuesday.

"They have really misread things this year," he tweeted.

"RBA has only cut 25bps since June - despite hard evidence of below trend growth. Obviously it should go 50 (basis points or half a percentage point) tomorrow."

Retailers feel the pinch

The ABS figures showed household goods retailers fared worst in October, with sales down 1.6 per cent, while cafes, restaurants and takeaway food services experienced a 0.3 per cent drop.

Department stores and clothing stores also saw their sales drop 0.1 per cent.

Food retailers were the only sub sector to record sales growth during the month, with spending up 0.9 per cent.

Conditions were worst in the Australian Capital Territory and Tasmania (down 2.2 per cent and 1.9 per cent respectively) and strongest in the Northern Territory and Western Australia (up 1.5 per cent and 0.9 per cent respectively).

The RBA has also been managing expectations about the longevity of the mining boom in recent months, and recently warned that the resources boom will peak earlier than expected.

With the mining boom slowly depleting, the RBA needed to lower rates to ensure that other areas such as business investment, housing construction and retail spending fill the growth gap.

In its most recent statement on monetary policy, the RBA downgraded its outlook for the Australian economy and put growth as "a little weaker" at just below 2.75 percent in the year to June 2013.

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Kochie: What the rate cut means for you

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