Monday, February 6, 2012

RBA poised to cut rates for third month but it will be a close call

The board of the Reserve Bank holds its first meeting of the year tomorrow and bets are firming for another rate cut.



Tomorrow's meeting takes place in a slightly less fragile world than the final meeting of last year, amid positive economic news from the United States and a moderate easing of the eurozone's debt woes.

Just before Christmas, a catastrophic meltdown of the eurozone was looking likely, and that prompted rate cuts in November and December.

Now Europe is pulling back from the precipice, even though a deal to prevent a disorderly debt default in Greece remains elusive.

On the weekend the jobless rate in the United States fell to 8.3 per cent, with an unexpected 240,000 new jobs created.

And the RBA board will be heartened by falling inflation in Australia, which could be the trigger for an additional rate cut.

Most economists are tipping a rate cut down to 4 per cent, but it is a close call.

The RBA is on record as saying it calibrates the cash rate to ensure mortgage rates are at the right level.

So there has been some speculation that the board might provide a larger rate cut to ensure any reduction is passed on to borrowers.
But rate watchers such as Rob Henderson, chief markets economist at National Australia Bank, say that seems unlikely.

"There have been some people in the market saying that the Reserve Bank might actually cut by 50 basis points to make sure that there is a significant drop in borrowing costs, but I think that is just a little bit too cute," Mr Henderson said.

"I think that actually the Reserve Bank won't try and second-guess the market; they will do their 25 basis points if they think another cut is appropriate.

"They'll see what the banks do and if it is not all passed on, of course they can come back later and do one more rate cut after that."

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