Australia's RBA Saw Benefit of Moving to Neutral Rate

By Jacob Greber

Nov. 18 (Bloomberg) -- The Australian central bank's interest rate cut this month was to move ``monetary policy quickly to a neutral position,'' policy makers said, stoking speculation they'll reduce borrowing costs again in two weeks.

``The marked deterioration in global financial conditions over the past couple of months'' was likely to ``have a significant effect on business and consumer sentiment'' and prompt cuts to investment spending, policy makers 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 because of concern the global financial turmoil would hurt the nation's economy, the minutes said. The board cut the rate by three quarters of a point to a 3 1/2-year low of 5.25 percent, adding to reductions in October and September.

``The bank is a lot gloomier,'' said Michael Workman, a senior economist at Commonwealth Bank of Australia in Sydney. ``We can expect further rate cuts and they will be large.''

The Australian dollar fell to 64.62 U.S. cents at 2:52 p.m. in Sydney from 64.82 before the minutes were released. The two- year government bond yield increased 7 basis points to 3.47 percent.

Economy is Cooling

Recent reports support the board's view that Australia's economy is cooling. 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.

``Key factors in members' consideration of the policy decision were the continuing poor conditions in financial markets, the significant deterioration in the outlook for the world economy'' and the likelihood that inflation would fall over the year ahead, the minutes said.

Figures published yesterday showed Japan's economy in the third quarter entered its first recession since 2001, joining the U.K., U.S. and Germany. The central bank's minutes also noted that ``there had been further signs that China and other parts of the developing world were now slowing.''

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.

Lower Household Wealth

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 43 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.

``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.

`Significant Case'

``There is a significant case for the cash rate to be cut by at least 75 basis points in December, bringing it down from neutral to a more accommodative stance,'' said Benjamin Dinte, an economist at Macquarie Group Ltd. in Sydney.

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 said. 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,'' the minutes said.

Governor Stevens is due to give a speech entitled ``The Economic Situation'' at 8:35 p.m. tomorrow in Melbourne.

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