Reserve Bank undecided over interest rate decision

The Reserve Bank of Australia (RBA) was indecisive whether to pause on interest rates in March and wanted to evaluate the effects of earlier cuts and the Federal Government's fiscal stimulus packages.

At the RBA'S March the 3rd meeting, the minutes released stated that the board faced a close decision, despite expecting the Australian economy to have contracted in the final quarter of 2008.

The board left the cash rate on hold, and at a 45 year-low of 3.25 per cent, for the first time since August last year. At the last five meetings, the board cut the cash rate by 4 percentage points.

The minutes recorded that members could see reasonable cases for both courses of action. Upon consideration they judged that, having made a major change to monetary policy over the preceding several meetings in anticipation of weak economic conditions, the best course for this meeting was to leave the cash rate unchanged. It was felt that this would leave adequate flexibility for policy at future meetings.

Board members made note of the size of the rate cuts as being large by historical standards and, together with the Federal Government's total $52 billion in fiscal stimulus, it would take time to assess the impact on the local economy. The minutes further recorded that the monetary policy 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 time for the full impacts to come through.

The board noted that the Australian economy was better positioned than other economies and the speed of the downturn in the global economy had bothered the confidence of consumers and would be reflected in weak domestic data for the recent period.

The Australian Bureau of Statistics released the national accounts for the December quarter revealing the first contraction in quarterly gross domestic product (GDP) in eight years. GDP shrank 0.5 per cent in the last three months of 2008, ABS data showed. The near-term outlook for the global economy therefore remained very weak and official forecasts of world economic growth was likely to be revised still further.

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Published on March 3-th, 2009 in Home Loans
Damon Rasheed is the CEO of Rate Detective, an Australian financial service comparison sites specialising in Life Insurance, Income Protection Insurance and home loans. Damon holds a Master's Degree in Economics from the University of Melbourne and has been involved in many start-up internet businesses.
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