February 06, 2012
INTEREST rates are expected to be lowered this week for the third time since November, but a decision to do so will be more finely balanced than financial markets expect.
A survey of 18 economists by Dow Jones Newswires shows 16 expect the Reserve Bank of Australia to tomorrow lower its benchmark cash rate target by a further one quarter of a percentage point to 4 per cent.
Economists say the RBA has room to cut rates largely because they remain high by world standards. The weak global economic backdrop, evidence of accelerating layoffs locally, and low inflation helps round out the justification for a cut.
But members of the RBA's policy-making board are expected to have some reservations about another reduction. There are signs the local economy still has some pep, while the global environment is not as dark and foreboding as it was in late 2011.
Official inflation data in the fourth quarter showed core price pressures, which are key to policy making, remained tucked well within the desired 2 per cent to 3 per cent band. But the happy outcome was largely the result of an elevated Australian dollar.
The Aussie dollar currently has a strong foothold above parity with the greenback, recently trading near 5-month highs at $US1.0744.
Import prices have been falling as a result, keeping a lid on inflation.
But non-tradable inflation rose at an annual 4 per cent pace in the fourth quarter. It showed demand pressures are still considerable in the economy. The inflation picture could turn nasty if the Australian dollar suddenly fell.
Europe's woes remain a major focus at the RBA, but by comparison with the period in late 2011, fears have eased.
The less worrisome mood was reflected in comments Friday by the chief executive of Westpac, Gail Kelly, who said the risk of a cataclysm in Europe was now much reduced.
"I think the actions of the European Central Bank in December were very important to take off the table the cataclysmic risk of the eurozone collapsing," she said.
Recent lay-offs in the manufacturing sector have also raised concern about the pace of job creation. Still, Australia's unemployment rate has remained largely unmoved over recent months, suggesting the fears could be overdone.
Policy makers at the RBA look to the unemployment rate first over the month-to-month volatility in employment.
"We expect the RBA to deliver a third consecutive rate cut this week, but acknowledge that the decision looks near-enough to a coin-flip," according to Stephen Walters, JPMorgan's chief economist.
Article by James Glynn From: Dow Jones Newswires