RBA cuts cash rate to 3%

At its December Board meeting, the Reserve Bank of Australia (RBA) decided to cut the cash rate by 25bps, to 3.0%, the same level it reached during the global financial crisis.

In Macquarie's view, the two key questions for monetary policy are: first, whether monetary policy is less effective when households are trying to deleverage (particularly when the other arms of macro-policy -- fiscal policy and the exchange rate -- are working against it). And, second, whether the RBA's decision in December has any implications for the outlook for rates over 2013

In Macquarie's view, the RBA will still need to cut the cash rate to 2% over 2013 in order to get the traction on housing construction that is needed to support growth.

It seems clear, however, that the RBA doesn't share this view. It seems that the RBA will only change its tune when there is irrefutable proof that mining investment has declined or that unemployment has risen much more sharply than the Bank is prepared to tolerate. And if that is the case, then the RBA may well remain the reluctant rate cutter for a few more months yet.


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