Australian RBA Saw Benefit of Moving to Neutral Rate

By Jacob Greber

Nov. 18 (Bloomberg) -- Australian central bank policy members cut borrowing costs this month for the third time in nine weeks to move ``monetary policy quickly to a neutral position.''

``This would enable a further meaningful reduction in rates paid by borrowers and could assist confidence among consumers and businesses,'' members of the Reserve Bank's board said in minutes of their Nov. 4 meeting, released in Sydney today.

Governor Glenn Stevens urged members to consider reducing the overnight cash rate target by either half a point or three quarters of a point on concern global financial turmoil is buffeting the nation's economy, the minutes said. The board cut the rate by three quarters of a point to 5.25 percent, adding to reductions in October and September.

``The marked deterioration in global financial conditions over the past couple of months'' was also likely to ``have a significant effect on business and consumer sentiment,'' the minutes said. ``This would probably lead to a significant curtailment of planned investment spending and caution on the part of households.''

The Australian dollar fell to 64.51 U.S. cents at 11:34 a.m. in Sydney from 64.82 before the minutes were released. The two- year government bond yield increased 2 basis points, or 0.02 percentage point, to 3.42 percent.

Recent reports support the board's view that Australia's economy is cooling as consumers and businesses cut spending. Business confidence plunged in October to a record low, consumers were pessimistic in November for a 10th straight month and house prices dropped in the third quarter by the most since 1978.

Growth Forecast

Gross domestic product grew 0.3 percent in the three months through June, the slowest quarterly pace in more than three years, as consumer spending contracted for the first time since 1993. Third-quarter GDP figures are due on Dec. 3.

The central bank has reduced borrowing costs by two percentage points since early September in the most aggressive round of reductions since a recession in 1991. It cut its 2008 economic growth forecast last week to 1.5 percent from 2 percent.

Policy makers said previous reductions in the benchmark rate, as well as a A$10.4 billion ($6.7 billion) government stimulus package to stoke spending, wouldn't ``fully offset the negative forces on the domestic economy arising from deteriorating international conditions, lower commodity prices and lower household wealth.''

Falling share markets, including a 42 percent plunge in the benchmark S&P/ASX 200 Index this year, and declining house prices have slashed household net worth by 8 percent since the start of 2008, the minutes said.

`Few Precedents'

``Members noted that there were few precedents for the current developments in household wealth.''

Policy makers will cut the rate by another half point on Dec. 2 to 4.75 percent, according to 13 of 22 economists surveyed by Bloomberg News last week. The rest expect reductions of between 75 and 100 basis points.

The currency's 34 percent decline since reaching a 25-year high of 98.49 on July 16 means inflation ``could take longer than previously thought'' to fall back within the bank's target range of between 2 percent and 3 percent, today's minutes show. Annual inflation surged 5 percent in the three months through September.

While this month's cut to borrowing costs ``could pose risks to inflationary expectations, these were regarded as manageable in the context of a generally disinflationary environment over the next couple of years,'' the minutes said.

Policy makers judged that this month's reduction in the benchmark rate ``would strike the right balance between the need to return inflation to the target and the need to reduce the risk of an unduly sharp weakening of demand.''

``Given the balance of risks, there was an advantage in moving the setting of monetary policy quickly to a neutral position.''

To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net