Interest rate cut could be Christmas treat
THE Reserve Bank has given its clearest signal yet that another interest rate cut is still on the cards and economists believe there is a good chance it could come in time for Christmas.
Financial markets are betting on a greater than 50 per cent chance the Reserve will cut the cash rate to 3 per cent in December, following the release of the minutes from its November board meeting.
It was always going to be a stretch that Tuesday's release of the minutes would offer anything new, given the RBA had only recently released its more in-depth quarterly monetary policy statement. But there was one sentence in the minutes that rang alarm bells among economists - ''[Board] Members considered that further easing may be appropriate in the period ahead.''
Treasurer Wayne Swan said lower interest rates were the benefit from the Labor government's ''responsible and successful'' management of the economy.
''Families right around Australia are benefiting from the government's responsible strategy to return the budget to surplus, which gives the Reserve Bank the flexibility to cut rates if it deems necessary,'' he said.
HSBC Australia chief economist Paul Bloxham said the minutes gave more forward guidance than previously.
''We expect another cut to the cash rate, probably before Christmas,'' Mr Bloxham said in a client note.
The minutes again explained why the cash rate was left unchanged at 3.25 per cent at the November board meeting, when many economists had expected another cut.
''With prices data for the September quarter slightly higher than expected and recent information on the world economy slightly more positive, the board judged that the stance of monetary policy was appropriate for the time being,'' the minutes said.
The central bank expects underlying inflation to remain close to 2.5 per cent - the middle of its 2 to 3 per cent target band - over the next two years, apart from the temporary effect of the carbon price.
Last week's release of the September quarter wage price index - the RBA's preferred measure of wage growth - did show some moderation in pressures compared with the previous three quarters.
Inflation aside, Treasury executive director for the macro-economics economics group, David Gruen, told a conference productivity improvements were crucial if living standards were to continue improving.
While rising terms of trade had supported incomes during the 2000s, productivity growth was historically the predominant source of income growth in the economy over the previous four decades. In the future, Australia's terms of trade would detract from income growth, as will an ageing population as baby boomers retire.