Global woes eclipsed RBA's doubts

October 21, 2008

Commentary by Garry Shilson-Josling, AAP Economist

The minutes of the Reserve Bank of Australia's October 7 board meeting confirm the overriding concern that prompted a hefty interest rate cut was the global financial crisis and impact on the world economy.

The first two of the six pages of the minutes released today were devoted almost exclusively to the financial crisis, its cloying effect on credit and equity markets and the response of policy-makers around the world.

The RBA staff recommendation to the board was for a 100 basis point (one percentage point) cut in the cash rate to 6%.

The minutes show the board accepted the recommendation despite concern that the cut, the biggest for 16 years, ``could have a negative effect on market sentiment''.

The crisis unfolding around the world clearly warranted the risk.

``The key factors for members' consideration were the sharply worsening conditions in international financial markets and the consequential deterioration in the global economic outlook,'' the minutes said.

The minutes included a reiteration of the warning in the statement announcing the cut, that the supersized move should not be seen as ``establishing a pattern for future monetary policy decisions.''

The minutes noted the RBA expected business investment spending plans to be scaled back, employment growth to slow further, and that the terms of trade (the ratio of export prices to import prices) had probably peaked.

The minutes also said that, as a result of the winding back of commodity prices, the gap between growth in gross domestic product (GDP) and real national income growth, was likely to narrow ``over the period ahead''.

That implied less of an external stimulus to the economy.

Despite this, and the lack of any clear hint about the monetary policy outlook, there is nothing in the minutes to dissuade anyone from the view that the likelihood is for the cash rate to be cut significantly from its current level, most likely from the next meeting on November 4.

AAP