RBA more open to cutting cash rate

06-RBA more open to cutting cash rate

By Jason Cadden and Lucy Hughes Jones

Sydney

(Australian Associated Press)

Sluggish inflation has increased the odds of an interest rate cut, but the RBA will only open the starter’s gate if there are signs the economy is weakening.

The Reserve Bank left its cash rate on hold at a record low 2.0 per cent for the sixth month in a row on Tuesday, but hinted it might be tempted to make a cut soon.

The decision suggests the RBA’s tradition of a Melbourne Cup day interest rate move is fading.

After changing the rate on the first Tuesday in November for five consecutive years between 2007 and 2011, the RBA hasn’t moved on Cup day for the past four years.

Governor Glenn Stevens said while the prospects for an improvement in economic conditions had firmed, inflation was weaker.

“The outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand,” he said in a statement after the RBA’s monthly board meeting.

Figures out last week showed that inflation for the year to September was 1.5 per cent, below the RBA’s two to three per cent target band for the fourth quarter a row.

Some economists believe the RBA could cut rates as early as December, while others expect one or two downward moves in 2016.

“They’re certainly telling us at the moment that the next movement is down, either this year or next year,” TD Securities head of Asia-Pacific research Annette Beacher said.

However, she’ll wait for Friday’s Statement on Monetary Policy from the RBA for further signs of an easing appetite before calling a cut.

JP Morgan economist Ben Jarman said the RBA’s tone didn’t necessarily point to a December cut.

“They used this kind of language before – mid year – and they didn’t follow through with any further cuts,” he said.

Mr Jarman said with inflation benign, any policy changes on the cash rate would come down to indicators like economic growth, retail sales and labour market figures.

“If they disappoint from here the door is certainly open to a cut,” he said.

“We aren’t forecasting another cut because we think the activity numbers will hold up enough to keep the RBA on the sidelines, but it is a close call.”

The RBA noted that economic conditions had firmed slightly, and Mr Jarman said better prospects for future growth could offset downward pressure on inflation.

He noted that last week’s business credit numbers were the strongest results since the global financial crisis.

“That seems to show the non-mining economy is starting to step up. That’s counter balancing last week’s soft inflation number,” he said.

“It’s that balancing act that’s keeping them on hold at the moment.”

AMP Capital chief economist Shane Oliver, who had tipped a Cup day rate cut from the RBA, now expects a move in either December or February.

Factors that could pave the way for a cut included a cooling in the Sydney and Melbourne property markets along with a possible slowdown in retail sales ahead of Christmas following mortgage rate hikes by the major banks, he said.

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