The Reserve Bank will spend the next six weeks considering the impact of its sharp rate cuts since September and the federal government’s $10 billion stimulus package before deciding on whether interest rates should fall again.
The bank wants to wait and see if the huge stimulus of higher spending a 3% cut in interest rates will slow the descent of the local economy; especially the impact of lower rates and first home buyers grants on demand for housing, which many analysts believe will lead the Australian economy upwards as 2009 goes on.
But more news yesterday on coal mine production cuts, lost sales and closures won’t help next year: upwards of $2 billion of lost sales (at an annual rate) was revealed yesterday.
The minutes of the RBA board meeting on December 2 that cut the cash rate by 1% to 4.25%, shows the bank’s management and board were clearly convinced for the need for a "substantial" rate cut to tide the economy over the December-January summer period.
The minutes, released this morning say that "The Governor proposed that members consider a substantial reduction in the cash rate.
"And there was also need to set a rate at a level that was clearly expansionary.
"The Board saw a need for the reduction in the cash rate, and bank lending rates, to be large enough to have a noticeable effect on financing decisions of lenders and borrowers.
"Members also took account of the fact that a Board meeting was not typically scheduled in January, given that local markets tended to be relatively thin over the summer break and statistical and survey data, as well as liaison information, were less timely.
"Overall, members judged that the two-month break between meetings was one consideration in favour of a substantial reduction in interest rates at this meeting.
"Accordingly, members felt that, on this occasion, a reduction of 100 basis points was appropriate and would contribute to supporting confidence among households and businesses.
In particular, a reduction of this size would move monetary policy quickly to an expansionary setting. Given trends in money market yields, the Board expected that most lending rates would fall significantly."
But now that the rate would be set at this expansionary level, it was considered that "The size of the response to date was judged to be such that a period of assessment of local and overseas events was warranted over the summer".
So unless something dramatic happens in the next month, there won’t be a rate cut in January, as some columnists and commentators were suggesting over the past two weeks.
"Although the Australian economy had been more resilient than other industrial economies, recent data indicated that a significant moderation in demand and activity had been occurring," the minutes read.
"Members agreed that it was appropriate to shift the monetary policy setting from its current roughly neutral position to one that was clearly expansionary." That means the bank clearly sees no threat from inflation next year, despite some chat in recent days from commentators worrying about the subject.
"Members observed that, with the decision at this meeting, there had been a major easing in monetary policy over the past few months.
"They considered that the setting of monetary policy, combined with the spending measures announced by the Government, which were soon to take effect, and the large depreciation of the Australian dollar amounted to significant stimulus that would support demand over the year ahead.
"The size of the response to date was judged to be such that a period of assessment of local and overseas events was warranted over the summer."
So no sign of another rate cut up the RBA’s sleeve; it will depend on the way home lending goes in the next month or so.
Australian Bureau of Statistics figures out yesterday revealed that there was a sharp slump in new home starts in the September quarter:
The number of dwelling commencements fell by 10.7% to 35,425 units, seasonally adjusted, in the quarter, while in the year to September; total dwelling commencements dropped 9.1%.
These figures are already known from the monthly figures and aren’t a big surprise. The RBA started cutting rates in September.
The November figures for building and home loan approvals will therefore assume greater importance, while car sales figures for the month and retail sales will also help the bank in its assessment.
December’s figures will come after the RBA board meeting in February.
The board might wait until March for another move if it sees some signs of resilience in the economy.
Harvey Norman may have helped this morning when it reported that in the four weeks to last Sunday, December 14, its same store written sales had risen 4.5%.
That’s the highest rise for more than three months and means the country’s biggest furniture and electricals retailer has now had three positive weeks of sales, each one higher than the last.
