Rate cut more likely: RBA

The chance of an interest rate rise in the near future appears to have all but disappeared, with last month’s Reserve Bank of Australia board meeting minutes exhibiting a new degree of caution.

The minutes from the 4 March meeting, at which it decided to raise rates 0.25%, show the RBA was as concerned about the need to cut rates as raise them in “the months ahead”.

The minutes released this morning show not only do RBA board members now believe the “overall tightening in financial conditions since the middle of 2007 to be substantial”, they also judged that “the higher setting of the cash rate would leave adequate flexibility to respond as necessary over the months ahead to new information about prospects for economic activity and inflation”.

Decoded, this means that the RBA will now be looking closely at Australian economic data for any signs of a too-fast slow down or recession and believes it has some room to cut rates if it becomes necessary.

The RBA also recognised that tighter international lending conditions are likely to see banks further lift rates of their own accord.

That doesn’t mean the Australian economy is completely out of the woods, however, with inflation still at “uncomfortably high” levels.

St George senior strategist Besa Deda says although some on the markets are interpreting the RBA’s comments as suggesting it could cut rates in the short term, it is more accurate to see the minutes are reflecting a “wait and see” approach.

“The considerable uncertainty facing global financial markets and the global economy will mean that the RBA will be cautious and prudent in its approach,” Deda says.

On the markets today, Australian traders appear to be replicating the extreme volatility experienced in the US overnight, with the S&P/ASX200 rising and falling in a range of 60 points this morning.

At 12.45pm the S&P/ASX200 is up 0.2% on yesterday’s close to 5098.6, but it is likely there is plenty more movement to come as the afternoon wears on.

The Australian dollar has also fallen significantly on the uncertainty and the RBA’s more moderate attitude to inflation, and is trading at US91.75c at 12.45pm, down from yesterday’s US92.59c close.

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