Cash Flow Advantage Blog

RBA Statement on Monetary Policy

• The Reserve Bank has signalled that further interest rate cuts are a possibility, especially given that its previous forecasts for growth have now been downgraded, and inflation is now expected to remain within the 2-3 per cent target band.
• The RBA has warned that risks are weighted to the downside. Annual GDP growth forecasts in June 2012 have been cut from 4.5 per cent to 4.0 per cent. Underlying inflation is tipped to ease to 2.5 per cent in June 2012, down from 3.0 per cent
• Given that interest rates are at the high end of the normal range there is a high chance of an additional rate cut at the February board meeting. However any further rate cuts will largely be dependent on Europe. “The Bank's central scenario continues to be one in which the European authorities do enough to avert a disaster, but are not able to avoid periodic bouts of considerable uncertainty”.
• The Reserve Banks central forecast assumes interest rates are unchanged over the forecasts period but given “A materialisation of the downside risks would likely be very disruptive for Europe and could result in a deep recession” it may result in the Reserve Bank cutting rates earlier than anticipated.

What does it all mean?

• What a change three months make. The mood and tone of the Reserve Bank has changed from one of optimism to considerably more downbeat. Economic growth forecasts have been downgraded substantially while inflation is now expected to hold comfortably within the 2-3 per cent target band over the forecasts period.
• Interestingly the central bank has not highlighted much in the way of upside risks to growth forecasts. Rather the Reserve Bank goes one step further indicating the heightened downside risks to forecasts. The weakness in the domestic economy, slowdown in advanced economies and the threat that the European sovereign debt crisis gathers pace and adds to serious market volatility.
• The Reserve Bank is clearly focussing a lot more attention on global conditions, particularly given the concerns surrounding Europe. In fact any further rate cut is likely to be as a result of the volatility in Europe. It is important to point out that the longer it takes to find a solution to the European debt crisis the more heightened the risks are for the global economy. In addition a further rate cut would help to shore up domestic confidence and ensure that monetary policy move to a more neutral setting.