RBA in no rush to cut rates further

The Reserve Bank’s decision to leave official interest rates on hold at 3% was no surprise, but now economists are divided on when – or if – the RBA will cut rates again.

While the RBA said that the global economy appeared to be stabalising, it has left the door open for further rate cuts if local conditions deteriorate.

“The prospect of inflation declining over the medium-term suggests that scope remains for some further easing of monetary policy, if needed. In assessing how it might use that scope, the Board will continue to monitor how economic and financial conditions unfold, and how they impinge on prospects for a sustainable recovery in economic activity,” RBA governor Glenn Stevens said in his statement following yesterday’s board meeting.

ANZ ‘s head of Australian economics and interest rate research, Warren Hogan, says that at first glance, Steven’s statement appears at off with the flow of improving economic data in recent weeks.

“Our guess is that the RBA is trying to calm some recent trends in local markets, in particular rising term interest rates and the winding back of easing expectations, but probably more importantly the strong rise in the Australian dollar.”

JP Morgan chief economist Stephen Walters says the RBA probably wants to retain sufficient policy ammunition to deliver more rate cuts as the jobless rate rises.

“We retain the view that the RBA’s easing cycle is not yet over, but officials will be in no rush to deliver what we expect will be another 50 basis points of official rate cuts in the latter six months of the year.”

Before yesterday’s statement, most economists were tipping another rate cut in August. Now it looks like the next interest rate cut may be delayed until the last quarter of 2009, when the RBA will have a better idea of how serious the problem of rising unemployment may become.

“The ongoing exuberance in the global financial markets and the volatility in domestic labour markets are likely to delay the timing of the Bank’s next rate cut beyond our August target,” says Westpac’s chief economist Bill Evans.

“We still expect rate cuts which may total as much as 100 basis points, but would now not expect the first move until September / October.”