Tuesday, April 17, 2012

Interest rate cut tipped for May as Reserve Bank waits on inflation update

By Business editor Peter Ryan

The Reserve Bank has signalled that official consumer inflation data out next week could be the trigger for an interest rate cut in May.

In the minutes from its latest meeting, the RBA board noted that it would focus on the official Consumer Price Index due to be released by the Bureau of Statistics on April 24.

Listen to my analysis broadcast on the ABC's The World Today.

Read the April meeting minutes released today by the Reserve Bank.

"If slower growth in demand could be expected to result in a more moderate inflation outcome, then a case could be made for an easing of monetary policy," the RBA board said in the minutes.

"The board would have an opportunity at its next meeting to review the inflation outlook based on comprehensive data on new prices as well as information on demand and output."

In leaving the cash rate on hold at 4.25 per cent at its April meeting, the RBA board "judged it prudent to evaluate those data before considering a further policy adjustment."

Read my story on ABC News Online.

Financial markets are pricing in a 90 per cent chance that the RBA will cut interest rates by 25 basis points at its May 1 meeting, with some economists tipping a more aggressive move of 50 basis points.

In previous statements, the RBA has repeatedly signalled its comfort with moderating inflation, which is expected to be within the central bank's target range of 2 to 3 per cent in the next two years.

The Reserve Bank also suggested that a softer than perceived labour market could add to the case for a cut in the cash rate.

"Despite the rate of unemployment showing little change for some time, it was apparent that labour market conditions had softened over the course of 2011," the bank said.

"An easing in average hours worked and a decline in the participation rate were indicative of a softer labour market than implied by the unemployment rate."

On the controversial issue of funding costs for banks, the RBA board noted that Australian banks had taken advantage improved conditions to issue a large volume of secured and unsecured debt.

The minutes note "a significant fall" of around 50 basis points in five years, "which would help to alleviate the pressure of higher funding costs in coming months".

However, the RBA board was also briefed on the costs of term deposits for banks, which has sparked a competition war that has seen costs rise materially relative to the official cash rate.

The board also noted that the lingering debt crisis in Europe "continued to be a potential source of adverse
shocks to the world economy" despite risks to global growth having receded in recent months.

However, the RBA says Spain is the new concern in Europe, given the recent decline in the nation's fiscal position and its soaring bond prices.

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