RBA hints at another cut in rates as growth falters

THE Reserve Bank appears to have become more cautious about the economy just as conditions in Europe and the US show signs of improvement.

A statement on monetary policy, released on Friday, shows the central bank has slightly reduced its forecast for economic growth for this year, with unemployment expected to drift gradually higher. The comments follow the Reserve this week keeping official cash rates at a 3½-year low of 3 per cent.

The RBA also damped mortgage holders' hopes that variable mortgagee rates would fall independently of further official cuts to the cash rate, given recent falls in bank wholesale funding costs were expected to "take some time" to filter through to overall bank funding costs.

As well, competition for domestic deposits remained high, it said.

While the average interest rate on the big banks' short-term deposits had fallen about 25 basis points in the past three months, roughly in line with the cash rate, the interest rates for longer-term deposits eased about 10 basis points as banks fought to keep customers, the RBA noted.

The observations came as ANZ said it would keep its variable mortgage interest rates on hold at 6.4 per cent in its first review of the year.

The Australian Bankers Association's chief executive, Steve Munchenburg, said it would take a long time before any improvements in wholesale funding improved the overall funding situation. "It's certainly way too early to talk about what the banks might do," he said. Mortgages were already at near-record lows.

The Australian dollar, which weakened against major currencies this week, was sold off a further 20 basis points on Friday to a low of $US1.0256 after the RBA's statement was released. By close it had clawed its way back to $US1.0288 on solid Chinese exports data.

Even so, the historically high exchange rate has been helping to contain inflation within the RBA's target band of 2-3 per cent.

Economists said the statement showed another rate cut was on the cards.

"The RBA has downgraded its economic growth outlook to a greater extent than we expected, as it continues to see inflation as remaining consistent with its target," Alvin Pontoh, TD Securities' Asia-Pacific macro strategist, said. "This combination gives substance to RBA's comments on Tuesday that 'the inflation outlook affords scope for further easing if judged necessary', leaving the door wide open for a rate cut."

In preparing its domestic forecasts, the RBA assumed the exchange rate would remain around $US1.03, and Brent oil would remain at $US113 a barrel. It also assumed the cash rate would be unchanged over the rest of the forecast period, at 3 per cent, following the 25 basis points cut in December.