RBA Kept Cash Rate Unchanged But Hinted Further Easing

As widely anticipated by the market, RBA announced to keep interest rate unchanged at 3% for the second month. The most stunning comment by the central bank is that moderation in inflation pressure may trigger further easing in the future.

In the accompanying statement, RBA Governor Glenn Stevens said that economic stimulus in many countries has helped containing global economic downturn and recent economic indicators have shown stabilization in declines. However, the central bank remained concerned about asset quality and tight credit conditions.

RBA believed that monetary policy has been eased significantly as shown in low market and mortgage rates as well as below-average business loan rates. However, 'the prospect of inflation declining over the medium term suggests that scope remains for some further easing of monetary policy, if needed', suggesting further rate cut is quite possible in coming months. At current stage, we hold the view that RBA will continue to monitor the effect of previous 425 bps cuts since September 2008 and the AUD 90B government spending in the economy next month. However, one or two 25 bps reduction will be adopted later in 2009 while exact timing will depend on upcoming economic data, especially unemployment rate and GDP growth.

Moreover, RBA raised concerns about decline business credits. The chart below shows that business credit has dropped 4 out of 5 months recently. Persistence in the situation signals companies are postponing investment plans and seeking to deleverage. This would increase risk to economic recovery and may trigger another rate cut.