Australia's RBA: Stimulus Boost Takes Time

Australia's central bank said the global recession would continue to depress the domestic economy in the near term, but held out the prospect that significant stimulus from lower interest rates and fiscal spending would lead to stronger demand later this year.

CNBC.com

Minutes from the Reserve Bank of Australia's (RBA) Feb. 3 policy meeting released on Tuesday showed its policy board felt that government stimulus would take time to work and would have a modest effect in the near term.

"Given the speed at which the global contraction has occurred, short term prospects were thus still for weakness in demand and output," the minutes showed.

"Nonetheless, the substantial measures taken would help to cushion the economy from the contractionary forces coming from abroad and, over time, work to establish conditions conducive to stronger demand later in the year."

At the February meeting, the central bank cut its key cash rate by 1 percentage point to a record low of 3.25 percent, citing a grim global outlook.

On the same day, the Labor government weighed in with a fiscal stimulus package of A$42 billion ($27 billion) in infrastructure spending and income support, on top of A$10.4 billion of pump priming late last year.

The Australian dollar slipped with markets still pricing in a further
50 basis points cut by the RBA in March. But some analysts think it might prefer to wait and see how past easing is working.

"The RBA does not feel obliged to respond further to immediate weakness," said John Edwards, chief economist at HSBC. "If the Australian economy continues to weather the storm as well as it has for the last few months, the RBA may find that today's cash rate of 3.25 percent is quite low enough."

Strong Headwinds

Since September, the central bank has slashed the rate by 400 basis points to cushion the economy from the global downturn.

"The headwinds from the global economy were very strong and continue to have a significant negative effect  on the domestic economy in the near term," the minutes showed.

Six of Australia's top 10 trading partners are already in recession. Japan's economy plunged into a recession with its worst quarterly decline since 1974, while China's exports in January fell nearly a fifth.

Last week, the RBA cut its forecasts for growth, expecting the economy to grow by just 0.5 percent in 2009, while unemployment is likely to rise significantly in the months ahead, from the current 4.7 percent.

"Conditions in the labor market were softening," the minutes showed. "The forward indicators of job vacancies and employment intentions from business surveys indicated that further deterioration was in prospect."

Uncertainty about jobs was likely to keep consumers from spending and that would impact retail sales, which rose modestly in December.

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"Liaison with retailers conducted by the staff indicated that sales had picked up noticeably in December, but it seemed that they had weakened again in January," the minutes showed.

The RBA board members were also informed that inflation was slowing, driven by falls in housing, rent and air travel prices. It expected the consumer price index inflation rate to fall rapidly in the near term, due to a decline in petrol prices.

"Given the contractionary forces coming from abroad and the clear evidence that inflation on a downward trend again, members judged that another substantial easing of monetary policy at this time was appropriate. They supported the recommendation of a cut of 100 basis points," the minutes showed.

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