The case for the RBA to pause in March has strengthened.
Good morning.
In the past few weeks, the RBA has has been steadily delivering a consistent message that monetary policy has quickly moved to an expansionary setting,
Glenn Stevens has emphasised that there has been a substantial pass-through of the 400 point reduction in the official cash rate to variable mortgage accounts, and the transmission process is working well in Australia.
Since the February Board meeting, the Government's $42 billion stimulus plan has been passed by both houses of parliament, with substantial payments due to be made in March. The effects of this package will not be known for some time, although following the December stimulus package, retail sales increased in January. Maybe a co-incidence but a statistic never the less.
Following the 100 point rate cut in February to 3.25%, financial markets early pricing for next week's March meeting, was for another aggressive rate cut by the RBA, which was consistent with the recent past pattern.
However, the repeated RBA message has impacted on market sentiment and pricing. Clearly economic data in Australia is not as bad as expected, with better retail sales data, unemployment statistics not as critical as forecast and some pick-up in the housing market.
Today's strong Private Capex data, and yesterday's equally strong Construction Spending, will have impact on next Wednesday GDP outcome. Estimates for Q4 of 2008 were at -0.1% this morning, and it remains a very close call if the quarter will be a negative. Recent data should help push the quarter result above zero.
Clearly the problems of Global concern have not gone away, Equally apparent is that conditions in Australia are better than in many other major economies. The Australian trading banks, are much better performing than many of the larger US, UK and European banks. Prudential supervision by the RBA has placed the banking sector in a much better situation to withstand the global slowdown.
More importantly , rate reductions in Australia are impacting on individuals via variable rate mortgages, which account for about 80% of the housing market.
Summary.
The most recent patten of RBA reductions has seen:
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100 point cut in Feburary to 3.25%,
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No change to the cash rate in January, with no scheduled meeting and the RBA not calling for a special meeting
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100 point cut in December. Board members took into consideration that a board meeting not scheduled for Jan.
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These recent moves have positioned the Cash Target rate well below its previous cyclical lows.
Since establishing an expansionary setting of policy at 3.25% in December , the RBA will consider at length the impact of the Government's Feburary $42 bil fiscal package, which will provide significant stimulus to the economy in the months ahead.
With the known lags for monetary policy to have impact, and the significant fiscal stimulus that will proceed in March, there is a clear case for the RBA to take another pause and evaluate the moves to date.
The most recent phrase chosen by the RBA to describe the combined settings of policy is that they "will help cushion the Australian economy. "
It is not expected that 3.25% will be the terminal rate for domestic monetary policy, but the money market risk is now for no change in March.
With kind regards,
John Craig
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