The Reserve Bank cut the cash rate by 0.25% on 7th April 2009. Financial markets had attached around a 70% probability of a rate cut of 0.50%, but there were also a large percentage of economists who predicted no change.

The RBA was likely encouraged to cut the rate further by continued weak economic conditions, both globally and domestically. However, the smaller cut was likely due to the Board weighing these influences against improving conditions in global financial markets. In particular, equity markets have lifted substantially off their lows. While market sentiment is still fragile, the recent run up in equities is fuelling some hope that economic conditions will improve later this year. The RBA also stated that “ the considerable economic stimulus in train in most countries” was a factor in the smaller size of the rate cut.

Weak Economic Data

The RBA noted that most recent assessments of the shorter-term outlook for the global economy continue to be negative. Domestically, continued weak data since the last RBA Board meeting, in March, was most likely a significant factor in the decision. GDP data for the 4th quarter showed Australia experienced a reduction in economic activity for the first time in eight years. Meanwhile the labour market continues to soften. In February, the unemployment rate shot up 0.4% to 5.2%. Leading indicators of employment, such as job advertisements, indicate that more rises in the unemployment rate are in store.

Confidence among both consumers and businesses remains fragile at best, suggesting spending will remain weak. Retail sales in February witnessed its sharpest monthly percentage drop in almost nine years. The RBA made special mention of the weakness in the demand for credit in its accompanying statement today. Private-sector credit slowed to an annual growth rate of just 5.4% in February, from the cyclical peak of 16.4% – the weakest pace since early 1994.

The only ray of light in the local economy is that the pick up in housing lending is advancing and there are now early signs it is flowing through to more building approvals.

Where to for the cash rate from here?

There appears to be a consensus amongst economists that we can expect further rate cuts later this year. Projections seem to point to rates bottoming out at as low as 2%. How low the cash rate goes, and how quickly it gets there is dependent on development in both the wider economy and the credit markets.