Another interest rate cut widely expected

3 Feb 2012, 2:46 pm   -   Source: AAP
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A third consecutive interest rate cut by the RBA is expected as inflation eases, local jobs growth slows and fears over a European recession grows.

The Reserve Bank of Australia (RBA) is expected cut its interest rate for a third consecutive meeting as inflation eases, local employment growth slows and fears over a European recession grows.

Thirteen out of 14 economists surveyed by AAP say the RBA will cut the cash rate to 4.00 per cent from 4.25 per cent on February 7.

The central bank cut the rate at both its November and December board meetings, taking the rate from 4.75 per cent to 4.25 per cent, due to fears the eurozone government debt crisis will cause a recession.

The RBA board did not meet in January.

HSBC chief economist Paul Bloxham said that even though a February cut had been widely expected for some time, recent data could make for a close decision at the RBA board meeting.

On January 25, the Australian Bureau of Statistics (ABS) reported that the annual rate of headline inflation for the December quarter was 3.1 per cent, close to the RBA's target band on two to three per cent.

Meanwhile, underlying inflation, which removes unusual quarterly price movements, was 2.6 per cent.

Mr Bloxham said the inflation data and weaker local economic figures had opened the door for a February rate cut.

He also said Australia's employment conditions are worsening, with the December unemployment rate at 5.2 per cent, up from a 2011 low of 4.9 per cent in April.

"The economy has also continued to ease back from operating at full capacity, taking further pressure off inflation," Mr Bloxham said.

"Growth is expected to ease in the first half of 2012 as Australia's trading partners slow down and the looser labour market weakens household spending."

There was some bright news on Wednesday, which raised some minor doubts about a February cut.

Solid January manufacturing data from China and Europe, on top of a raft of encouraging economic numbers from the US in the past month, has given economists some reason to be optimistic.

"Global financial conditions have stabilised recently, which may give the RBA more time to see the impact of earlier cuts," Mr Bloxham said.

"So, while we think the RBA will need to cut further, a cut this month is not a done deal."

AMP Capital chief economist Shane Oliver said the case to cut the cash rate again is strong.

"The jobs market is weakening, retail sales and housing construction are weak, house prices are falling and consumer and business confidence are sub-par," Dr Oliver said.

The RBA's quarterly Statement on Monetary Policy due on Friday (February 10) is expected to see further downwards revisions to the growth outlook and a benign outlook for inflation, which is likely to be consistent with a continuing easing bias in terms of monetary policy.

ICAP senior economist Adam Carr said there is no economic reason for the RBA to cut the rate at the February board meeting, but it's going to happen anyway.

"I say that because even the RBA board acknowledged in December that there probably wasn't really an economic justification to cut, they were doing it pre-emptively because of Europe but Europe has stabilised," Mr Carr said.

"The US economy has accelerated since then, Asian economic growth is strong and Europe has stabilised.

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