Cash flow

Reserve Bank – Cuts Cash Rate By 25 Basis Points To 3.25%: Cashflow

Reserve Bank cuts cash rate to 3.25% as 2013 outlook weakens

By Michelle Hammond
Tuesday, 02 October 2012

The Reserve Bank has lowered the official interest rate by 25 basis points, admitting the growth outlook for next year looks “a little weaker” on the back of international developments.


The widely-tipped cut takes the official cash rate to 3.25%. However, Westpac is tipping another 75 basis points will need to be cut by March next year in order to prop up non-mining sectors.


At today’s RBA board meeting, governor Glenn Stevens said the outlook for growth in the world economy has softened over recent months.


“Economic activity in Europe is contracting, while growth in the United States remains modest,” Stevens said.


Growth in China has also slowed, and uncertainty about near-term prospects is greater than it was some months ago.”


In Australia, Stevens said most indicators suggest growth has been running close to trend, led by large increases in capital spending in the resources sector.


“Consumption growth was quite firm in the first half of 2012, though some of that strength was temporary,” he said.


“Looking ahead, the peak in resource investment is likely to occur next year, and may be at a lower level than earlier expected.”


“Labour market data have shown moderate employment growth and the rate of unemployment has thus far remained low.”


“The bank’s assessment, though, is that the labour market has generally softened somewhat in recent months.”


Stevens said the introduction of the carbon price is currently affecting consumer prices, warning this will continue over the next couple of quarters.


Credit growth has softened, while the exchange rate has remained higher than might have been expected, Stevens said, given the decline in export prices and the weaker global outlook.


“At today’s meeting, the board judged that, on the back of international developments, the growth outlook for next year looked a little weaker, while inflation was expected to be consistent with the target,” Stevens said.


“The board therefore decided that it was appropriate for the stance of monetary policy to be a little more accommodative.”


Shadow small business minister Bruce Billson has already urged the banks to pass on the rate cut to business loans in order to “breathe some life” into the small business sector.


Meanwhile, the Australian Retailers Association said the rate cut is more than justified.


“The Australian dollar is relatively stable, inflation is at bay and retail is struggling, which is a sign consumers are unable to stimulate the economy through their spending,” executive director Russell Zimmerman said.


“Recent store closures and profit downgrades among iconic retailers, who have previously stood the test of time, is a sign of the industry struggling.”

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