Christmas pause on interest rate cuts

AAP - Australian households are likely to be waiting at least a few months for further cuts to their mortgage repayments.

But even if there's no more immediate relief from the burden of their home loans,
homeowners can look forward to a quicker-than-expected drop in the inflation rate,
due mostly to falling petrol prices.
After cutting the official cash rate by one percentage point in December, the
Reserve Bank of Australia (RBA) looks likely to wait and see how the economy reacts
to recent events before moving again on monetary policy.
Since September, the RBA has slashed the official cash rate by 300 basis points to
4.25 per cent, taking it to its lowest level in seven years.
The rate cut coincides with $8.7 billion worth of pre-Christmas payments to
pensioners and families, part of the Rudd government's economic stimulus package, as
well as falling petrol prices.
In the minutes of its December meeting released on Tuesday, the RBA board suggested
it may let these events, described as "significant stimulus", to percolate before
deciding whether to move again on the cash rate.
"The size of the response to date was judged to be such that a period of assessment
of local and overseas events was warranted over the summer," the bank said.
And the RBA board - which is due to next meet on February 3 - gave every indication
it wasn't planning a surprise return from its summer break.
The board meets on the first Tuesday of every month except for January and the last
time it held an unscheduled January meeting was in 1992, in the midst of a
recession.
"Members judged that the two-month break between meetings was one consideration in
favour of a substantial reduction in interest rates at this meeting," the RBA said.
Economists are unsurprised by the RBA's decision to draw breathe.
Westpac chief economist Bill Evans said the board wanted to evaluate the effect of
the consecutive rate cuts on a soft local economy suffering from a significant
moderation in domestic demand.
"We are not surprised by this approach and would, therefore, expect that only some
global financial catastrophe would prompt a decision before February 3," Mr Evans
said.
Commonwealth Bank economist Sara Hoenig doesn't expect to see any action before
February 3 but is tipping another 50 basis point cut at that meeting.
"We expect the RBA will cut rates by 50 basis points at its next meeting, in
February, and will then pause to assess the effect of 350 basis points of stimulus
on the Australian economy," she said.
While there isn't likely to be a post-Christmas surprise on interest rates, the RBA
did have good news for households on inflation.
Treasury forecast in November it was likely to be 2010-11 before the inflation rate
returned to the RBA's target band of two to three per cent.
But the bank now predicts inflation pressures will ease more quickly.
"CPI inflation was likely to fall more quickly in the short term as a result of the
recent falls in petrol prices, with this measure inflation likely to fall below 2.5
per cent by the middle of next year," it said.
The board also predicted a further, unspecified rise in unemployment, a point seized
on by opposition treasury spokeswoman Julie Bishop.
"This government has claimed that its spending packages will create tens of
thousands of new jobs, but clearly the reserve bank is not convinced," she said.
The jobless rate rose to 4.4 per cent in November, its highest level in a year.



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