By Claire Reilly
While it might not have been the event that stopped the nation, the Reserve Bank of Australia yesterday announced that it would lower the cash rate by 25 basis points to 4.5 per cent, effective today.
Speaking about rates drop, the Reserve Bank governor Glenn Stevens discussed a number of international factors that contributed to the decision, including “a moderation in the pace of global growth”. He noted that while a global financial crisis has not eventuated, there are still reasons to be fiscally cautious.
“The pace of US economic expansion picked up in the September quarter, but is still only moderate and leaves considerable spare capacity,” said Stevens. “China’s growth has slowed, as policymakers there had intended. Output in Asia has now recovered from the effects of the Japanese earthquake, and domestic demand in the region is generally expanding.
“Trade performance, however, is starting to see some effects of a significant slowing in economic activity in Europe, where the prospects are for economic weakness to continue,” he added. “Commodity prices, while still at high levels, have generally declined over recent months.
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Stevens noted that the global financial market has recovered over recent months, with positive signs emerging from the European debt crisis and strong economic data emerging from the US. However, he added that it would be some time before the concerns were completely “laid to rest” and that businesses and households are expected to be cautious in the ensuing period.
“Information about the Australian economy suggests moderate growth overall,” said Stevens. “Investment in the resources sector is picking up very strongly, with much more to come. Some related service sectors are enjoying better-than-average conditions.
“In other sectors, cautious behaviour by households and the high exchange rate have had a noticeable dampening effect.
“Over the past year, the Board has maintained a mildly restrictive stance of monetary policy, in view of its concerns about inflation. With overall growth moderate, inflation now likely to be close to target and confidence subdued outside the resources sector, the Board concluded that a more neutral stance of monetary policy would now be consistent with achieving sustainable growth and 2–3 per cent inflation over time.”