RBA paused on rates but `cuts to come`

The Reserve Bank of Australia (RBA) board was in two minds before deciding to pause
on interest rates in March, as it sought room to make more cuts in the future as the
economy deteriorated.
Economists are forecasting more rate cuts by the central bank this year but are
divided on whether the RBA will ease monetary policy at its next board meeting on
April 7.
The cash rate was kept at a 45-year low of 3.25 per cent following the board meeting
on March 3.
"Members believed this would leave adequate flexibility for policy at future
meetings," the board said in its minutes released on Tuesday.
The minutes noted that historically large rate cuts since September had been made in
anticipation of a deterioration in the local economy as world growth declined.
Between September and February the central bank lowered the cash rate from a 12-year
high of 7.25 per cent to 3.25 per cent.
Board members noted the question for monetary policy in March was whether to cut
rates or wait to assess the effect of previous cuts and fiscal stimulus in the
domestic economy.
"Members could see reasonable cases for both courses of action," the minutes said.
Westpac said the central bank left rates steady so it could adapt swiftly if the
economy deteriorated further.
"We assessed the decision to leave rates unchanged in March as a tactical move by
the bank to ensure it has sufficient flexibility to be seen to be continuing to cut
rates as the Australian economy contracts through 2009," the bank's economists said
in a research note.
In the minutes, the RBA board had anticipated the local economy would have
contracted in the December quarter of 2008.
When Australia's gross domestic product (GDP) for that quarter were released the day
after the board meeting it showed the economy shrank by 0.5 per cent, the first
quarterly contraction in eight years.
While JPMorgan chief economist Stephen Walters expects the RBA to cut the cash rate
by at least another 50 basis points in 2009, he said the board could pause again
next month.
"Having set a high benchmark for staying on hold, something material has to happen
to restart the easing cycle," he said.
"That said, bearing in mind how close a call the March decision apparently was, we
cannot rule out an earlier move, perhaps even on April 7."
The board said low interest rates and the federal government's total $52 billion in
fiscal stimulus initiatives appeared to be starting to flow through the economy,
although it was too soon to assess its effects.
"Early indications were that the monetary and fiscal stimulus that had been applied
to the economy was having an expansionary effect, but the size of this remained
unclear and it would take some for the full impacts to come through," the minutes
said.
St George bank chief economist Besa Deda sees the cash rate reaching a bottom of
2.25 per cent this year, adding that there is no certainty the RBA would cut next
month.
"The bank forecast a possible rate cut in April, 25 basis points or 50 basis points
at the most," she said.
Westpac expects the RBA to cut by 25 basis points in April.
With unemployment hitting a four-year high of 5.2 per cent in February and forecast
to reach at least seven per cent by mid-2010, Mr Walters said the RBA would have to
cut rates to spur job creation.
"It will be difficult, for example, for RBA officials to sit on their hands as
unemployment climbs towards double figures," he said.