Reserve Bank of Australia flags end to mortgage rate cuts and forecasts slower growth

The Reserve Bank of Australia has flagged the likely end of big interest rate cuts, with some economists betting it may hold back on further reductions for several months.
And financial markets scaled back expectations today on the depth of future interest rate cuts after the RBA released its quarterly statement on monetary policy.
A Credit Suisse report said financial markets now priced a total of 50 basis points in further rate reductions over the next 12 months, down from 68 points yesterday.
Macquarie Bank interest rates strategist Rory Robertson said he expected the RBA to “sit on its hands” at the next two meetings while it assesses the impact of the past five rate cuts and the federal Government’s $42 billion stimulus package.
“After having delivered an appropriately aggressive response to the post-Lehman Brothers collapse in global growth prospects, the RBA now can make a respectable case to wait and watch for a while,” said Mr Robertson.
“It’s certainly possible that rates will go to 2 per cent, but it will take longer to get there than three months.”
The central bank earlier this week slashed rates by 100 basis points to a 45-year low of 3.25 per cent, taking total rate cuts to 400 points since September, when the collapse of Lehman Brothers froze global credit markets and smashed equity markets.
In its statement today, the RBA said significant fiscal and monetary stimulus was now pumping through the veins of the crisis-weary economy.
Investors interpreted the statement as signally a more cautious approach to future easings in monetary policy, sending three-year bond futures down 15 points to 96.69 by late afternoon.
Australia's Central Bank also sharply lowered its forecasts for economic growth in coming years, implying that the economy was still at risk of joining major countries in recession before starting to pick up in late 2009.
The RBA expects year-on-year growth of 0.25 per cent in 2008-09, before improving somewhat in 2009-10 with growth of 1.25 per cent. The economy grew by around 1.9 per cent in the third quarter of 2008 from a year earlier.
The non-farm economy will post zero year-on-year growth in the June quarter this year before recovering to expand by 1.25 per cent on year in the middle of 2010, the central bank forecast.
“While the international situation is likely to remain difficult for some time, the combination of expansionary monetary and fiscal policies now in place will help to cushion the Australian economy from the contractionary forces coming from abroad,” the RBA said.
Mr Robertson said: “The bank has moved so far, so fast that its head is spinning and it’s time to sit back and assess the situation.
“The point of moving more gradually from here would be to ensure that the policy rate is properly calibrated to Australia’s economic prospects, not to the bleaker outlooks for the US, UK, Japanese and Euro-zone economies.”
NAB Capital senior economist David de Garis said he expected the RBA to cut rates by 75 basis points in March and then wait until the September quarter to cut rates by another 50 basis points.

There’s a time that central banks have to stand back and take a deep breath,

said Mr de Garis.
CommSec economist Savanth Sebastian said he expected the RBA to cut the cash rate by another 50-75 basis points over the next two months.
“More than likely the Reserve Bank will follow a similar pattern to that noted by the European Central Bank and keep rates on hold in March, assess all the incoming data before cutting rates once again in April,” said Mr Sebastian.
The RBA's growth forecast for the near term is slightly more pessimistic than the Rudd Government, which earlier this week forecast the economy would grow by 1.0 per cent in 2008-09, before slowing to 0.75 per cent in 2009-10.
The central bank forecast 2008-09 growth of just 0.75 per cent.
Late yesterday, Treasury Secretary Ken Henry, who is also a member of the RBA's policy making board, told a parliamentary committee that the Government's forecasts for economic growth were based on an assumption that rates will be cut further.
The impact of the intensified slowdown in the world economy in recent months and the economic stimulus being put in place would result in the downturn and recovery being more V-shaped, according to the RBA's latest forecasts.
Deeper troughs in growth will be followed by strong growth of 3.25 per cent on year by mid-2011. Previously the RBA had forecast the economy would be growing at 3.0 per cent by mid-2011.
Substantial stimulus has also flowed to the Australian economy in recent months as a result of a sharp decline in the Australian dollar.
The currency came close to parity with the US dollar in mid-2008, before plunging to just above US60 cents late last year and then recovering to around US65c currently. In trade weighted terms, the Australian dollar is 20 per cent below its level a year ago.
The RBA also revised its forecasts for inflation, predicting annual rises in the consumer price index would fall back to within the central bank's 2-to-3 per cent target band by mid-2009. Previously it had forecast the CPI would not be safely tucked within the band until mid-2011.
Despite expectations of an eventual growth recovery, the RBA expects the jobless rate will rise further. "With job vacancies and hiring intentions falling and short-term economic prospects subdued, more significant rises in unemployment are likely in the period ahead," the RBA said.
Some improvement in the house construction sector can be expected after a sharp downturn in 2008. Significantly lower interest rates and direct financial assistance for new home buyers by the government were now showing signs of adding to housing demand, it said.
Consumer confidence remained battered, but some recovery can be expected as the government spending measures and lower interest rates add "further to household incomes in the March and June quarters this year", the central bank said.
Also insulating Australia from the full heat of the global economic downturn was a strong financial sector, which has allowed a substantial amount of monetary policy easing to be passed through to consumers and more so than in many other countries, it said.
Still, the RBA is keeping close watch on business investment, warning investment intentions are being significantly wound back as some companies experience difficulty in obtaining credit.
Business confidence deteriorated sharply in October and November but this "has been partially reversed in December and January," the central bank said.
Against a backdrop of rising unemployment and weakening economic growth, the RBA would be under pressure to continue cutting interest rates for at least the next year or two, said Mr Robertson.