In A 'Wait-And-See' Manner, RBA Decided NOT To Cut Interest Rate In March

Against market expectation of at least a 25 bps cut, the RBA kept the policy rate unchanged at 3.25% in March. This is the first time in 7 months that the central bank decided not be slash interest rate as the policymakers believed the 400 bps reduction since September last and government spending of AUD 88B should help support the nation's economy.

In the post-meeting statement, the central bank admitted that economic conditions are clearly weak and consumer confidence remains fragile. Also, inflation will be declining in coming months. However, despite all these, demand growth in Australia was not as poor as that in other countries.  Financial system remains strong and the monetary policy transmission process is working to deliver large reductions in interest rates to end borrowers.

Moreover, in response to the deteriorating economy outlook, the RBA has adopted major changes in monetary and fiscal policies. The Government has kept mortgage rates and business loan rates at historically low level. Cash rates have been reduced by 400 bps from 7.25% in mid-2008 to 3.25% in February 2009. The central bank would like to pause for the moment to see if these swift and aggressive actions are sufficient to hold up the nation's economy.

We believe it will be more difficult to see the RBA cut rate again in coming months unless economic data show very high risk of sharp deterioration in Australian economy. Nonetheless, we do not think it's the end of the easing cycle. As stated in the last paragraph, 'on this basis, notwithstanding evident economic weakness at present, the Board judged that the stance of monetary policy was appropriate for the moment. The Board will consider the position again at its next meeting', indicating the central bank keeps the door open should there's any abrupt change in economic condition.

Tomorrow, 4Q08 GDP in Australia is expected to have risen 0.2% qoq and 1.2% yoy as driven by the 3.8% growth in December's retail sales. During the period, the Australian Government injected AUD 8.9B cash to elderly and family so as to boost consumption.