Declining Interest Rates – a further sizable reduction in the cash rate was appropriate…

Source: Mortgage & Finance Association of Australia (MFAA)

At its meeting on 3 February 2009, the Reserve Bank Board reduced the cash rate target by 100 basis points to 3.25%. Its next scheduled meeting is 3 March 2009. The Governor provided the following rationale for the decision:

…Measures to stabilise financial systems have contributed to an improvement in the functioning of credit markets over the past couple of months. This, in conjunction with expansionary macroeconomic policy measures being taken around the world, should assist in promoting global recovery over time. But the near-term outlook for the global economy is the weakest for many years.

Economic conditions in Australia have also been affected, though less than in other advanced economies. Australia’s financial system remains in a strong condition and large interest rate reductions over recent months have been passed through in substantial measure to end borrowers. Nonetheless, the combination of last year’s financial turmoil, a severe global downturn and substantial falls in commodity prices has had a significant dampening effect on confidence, and therefore on prospects for growth in demand.

Inflation has begun to moderate and, given recent developments, it is likely to continue to decline. In these circumstances, the Board judged that a further sizable reduction in the cash rate was appropriate, to give further support to demand. In making its decision, the Board took into account the package of measures announced by the Government earlier today. 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.