RBA cut rate to 49-year low

The Reserve Bank of Australia's (RBA) surprise decision to cut official interest
rates to a 49-year low may be the last reduction for a while.
Economists say the RBA could stay on the bench in coming months as it further
assesses the impact of fiscal and monetary policy stimulus now in the economy.

The central bank on Tuesday lowered the cash rate by a "modest" 25 basis points to
three per cent, after leaving interest rates unchanged at its last board meeting in
March.
The cash rate is now at its lowest level since March 1960, when the monthly average
was 2.99 per cent.
RBA governor Glenn Stevens said board members had "judged that there was scope for a
further modest adjustment to the cash rate" because the Australian economy was
contracting and demand for labour was weakening.
"The stance of monetary policy, together with the substantial fiscal initiatives,
will provide significant support to domestic demand over the period ahead," he said.
Interest rates for mortgage holders and businesses are already at historical lows,
after the central bank cut the cash rate by 400 basis points between September and
February.
The federal government has previously announced $52 billion worth of stimulus measures.
But unemployment is rising and the jobless rate could head above eight per cent next
year, some analysts say.
As well, the global economy continues to falter and the effect of worldwide stimulus
measures previously announced are "not yet discernible".
Westpac Banking Group chief economist Bill Evans said the RBA rate cut was
underpinned by downgrades to world growth forecasts and ongoing weakness in the
domestic economy.
Last week, the Organisation for Economic Co-Operation and Development (OECD) said
output in its 30 member countries would contract by 4.3 per cent in 2009, the first
fall in world output since the second world war.
"Consequently, we assess that the most important driver of this decision has been
the global growth view," Mr Evans said.
While debt futures markets had priced in a 25 basis point cut for Tuesday,
economists were dividend on whether the bank would cut or not.
Ausbil Dexia chief economist John Honan said RBA's decision to cut by a modest
amount rather than the 50 basis points some had suggested, signified it was
"mindful" of how much stimulus was in the economy.
"This is a balanced response between the deterioration that's still evident in the
labour market and the state of the economy versus the stimulus that's there," he
said.
HSBC chief economist John Edwards said the RBA's accompanying statement gave few
clues about the future for rate.
"They are leaving it quite open, so they are not certainly committing themselves to
further rate cuts," Dr Edwards said.
In its statement following a decision to leave rates steady on March 3, the RBA said
it would "consider the position again at its next meeting".
That line was omitted in this month's statement,
Mr Stevens also said while the economy was contracting, this was at a slower rate
than of Australia's trading partners.
Australia's gross domestic product contracted 0.5 per cent in the December quarter,
the first contraction in the local economy since 2000. The March quarter data are
not due until June.
Dr Edwards said a further deterioration in the Australian and global economies may
force the central bank to cut again.
"If the global or local economy is much weaker than expected, they will cut more,"
he said.
Westpac's Mr Evans said the central bank had not finished lowering the cash rate.
"We still expect that the rate can eventually fall further to our long held target
of two per cent," he said.