Well we now know the result, a 25 basis point cut to 4.25 per cent, but I don’t think either outcome (hold or 25bps cut) would have really been a surprise.
From the RBA’s press release, it’s clear that the cut was in response to events in Europe. The central bank notes that, "Financial markets have experienced considerable turbulence, and financing conditions have become much more difficult, especially in Europe.
"This, together with precautionary behaviour by firms and households, means that the likelihood of a further material slowing in global growth has increased.”
Noting the decline in commodity prices, the difficulty Australian financial institutions are having in obtaining term funding, subdued credit growth and a decline in asset prices, the RBA pulled the trigger.
It seems like another insurance cut though, rather than a response to an actual deterioration in domestic conditions. Indeed, the board’s view on the Australian economy was little changed. So purely on the domestic state of play they probably wouldn’t have cut.
"Information about the Australian economy suggests output growth has been close to trend, with demand growth stronger than that,” the press release read.
Private demand, we know from the partial data, looks set to be quite strong in the third quarter, with both households and businesses set to make a decent, and pretty much the only, contribution to growth on the expenditure side. So there is no need for further stimulus here. What the RBA board is concerned about is the impact Europe, market turbulence and tightening financial conditions will have on that.
Whether we get more cuts will depend entirely on Europe then, but unfortunately we can only watch events as they unfold – don’t forget the summit this Friday and the ECB are widely expected to do ‘something’ after treaty changes are agreed. As to the domestic dataflow, it starts to slow down for Christmas. Realistically, it won’t be until mid-January/early February that we get a good sense as to how the domestic economy is travelling against all this. So far, so good, but the longer this goes on, the less likely growth will remain solid.
The market currently expects a cash rate around 3 per cent by the middle of next year. I suspect we'll only get this result if Europe does actually implode. Otherwise we might see some corrective hikes. That's my current expectation, but it hinges on Europe sorting itself out, or at least stabilising. We'll see. If they can't or don't, we'll clearly get those cuts.
Adam Carr is senior economist at ICAP Australia. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.
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