Reserve Bank could be mulling more rate cuts

THE minutes of the Reserve Bank's rate-setting meetings always run the risk of being overtaken by events, and the rendition of the Reserve's December 4 meeting that has just been released is an example. The central bank cut its cash rate from 3.25 per cent to 3 per cent that day because it suspected economic growth was slowing, and did not have to wait long for confirmation.

There's a tendency for the investors to see the minutes as an up-to-date assessment of the economy, but they are in fact locked up within days of the monthly rate-setting meeting. The minutes that came out on Tuesday therefore did not reflect soft economic growth numbers for the September quarter that were released a day after the Reserve met, or bearish consumer and business sentiment surveys that were published a week later: that fact and variations in the language the Reserve has used suggest it is preparing to cut again even though it may have pulled a cut forward two weeks ago.

The December minutes note that at its previous meeting on November 6 the central bank's board believed that a rate cut was appropriate "in the period ahead" but withheld it because the September quarter consumer price index was up more that expected, and because growth overseas appeared to be improving. One month later, the case for a cut was still there and inflation concerns had receded.

The board was told again in December that global economic conditions had improved in the second half of this year, as the United States economy continued to expand moderately and as China's growth stabilised at a rate of about 8 per cent (as the Reserve had expected).

Its discussion about the rest of the world was a bit more cautious, however. It considered the risk of an economic slowdown in the United States if negotiations in Washington failed to deflect the so-called fiscal cliff of automatic tax increases and spending cuts next month, and discussed the depressing impact of uncertainty on business investment.

The board also continued to worry about the economic downturn that is flowing out of Europe's sovereign debt crisis, and attempts to solve it with fiscal cuts. It has been concerned about Europe all year. The November minutes reported that it was told that economic activity across Europe remained weak and that there were signs of a slowdown in the French and German economies, which until then had shown resilience.

In the December meeting, however, the board heard that real economic activity in Germany and France had slowed, and that Europe's crisis economies were continuing to shrink.

Countries including France and Greece had introduced new policies aimed at boosting their competitiveness and their fiscal position but their challenges remained "substantial", the board observed.

In the December 4 discussion of the domestic economy, inflation concerns receded and concerns about growth increased.

Inflation was the top domestic topic of the November meeting after a 1.2 per cent quarter-on-quarter rise in the September quarter consumer price index pointed to underlying annual inflation of about 2.5 per cent. It had come from some obvious places, including carbon tax price hikes for electricity and gas, but new house prices had also risen unexpectedly, and the inflation-dampening effect of a rising Australian dollar had faded as the currency settled close to historic highs.

The latest minutes, on the other hand, do not refer to inflation until it is noted and dismissed as a near-term threat in the board's reasoning for its decision to cut the cash rate. And while the board was told to expect the national accounts to show that the economy ran at close to its long-term growth trend in the year to September, it also considered more recent signs of softening consumption, weaker demand for labour and slower wages growth, tougher business conditions and a quicker-than-expected slowdown in mining investment. It all suggested that there still was a case for providing extra support for the economy, and there was scope to do so given the less-threatening inflation outlook.

A hint that the December rate cut pulled forward one that could have been delayed until February came with a final comment that the board had considered whether to cut rates "in the near term or wait for further information" before deciding there was merit in delivering the cut in December.

Developments since the meeting have shortened the odds on another cut early in the new year, however. The September quarter national accounts that came out a day after the Reserve met revealed growth of 3.1 per cent over a year, but that was down from 4.5 per cent in the year to March 2012, and annualised growth in the September quarter was only 2 per cent. The National Australia Bank's survey of business conditions for November a week later put business conditions and sentiment back down to 2009 crisis levels, and the Melbourne Institute-Westpac index of consumer confidence for December declined unexpectedly by 4.1 per cent to neutral territory despite the December interest rate cut.

The international outlook is probably a wash for the moment. Washington will sidestep the fiscal cliff, but quite possibly not until after the holiday break, when the automatic cuts actually create negotiating room. Europe will stumble along, with Spain the real powder keg.

Whatever happens overseas, however, events here since the December meeting have kept the central bank on track to continue to pull rates and borrowing costs down: a lousy Christmas for the retailers would add to the urgency.