Reserve Bank's caution points to further rate cut

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

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

The RBA's statement on monetary policy, released on Friday, shows the central bank has slightly reduced its forecast for economic growth for 2013, with unemployment expected to drift gradually higher. The comments follow the central bank this week opting to keep official cash rates at a 3-year low of 3 per cent.

The RBA also damped mortgage holders' hopes that variable mortgage rates would fall independent 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.

At the same time, the competition for domestic deposits remained high, the RBA said.

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

The Reserve Bank's 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.

Australian Bankers' Association 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 about that," Mr Munchenburg said, adding that mortgages were already at near-record lows.

The Australian dollar, which has 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 on Friday it had lifted to $US1.0288 on solid Chinese exports data.

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

Economists said the RBA statement showed another rate cut was likely to be 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 that the exchange rate would remain at its current high level over the forecast period, around $US1.03, and that the price for Brent oil would remain at $US113 per barrel. It also assumed that the cash rate would remain unchanged over the rest of the forecast period, at 3 per cent, following the 25 basis points cut in December.

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