Budget boost for Swan as RBA aims to cut rates in May

Peter Martin -Apr 4, 2012

Endorsed ... Wayne Swan.

Endorsed ... Wayne Swan. Photo: Alex Ellinghausen

BARRING surprises, the Reserve Bank board will cut official interest rates at its next meeting on May 1.

The move will deliver the Treasurer, Wayne Swan, an endorsement of his strategy a week before the May budget and open the way for a further cut at the board's June meeting.

The bank's cash rate has stood steady at 4.25 per cent since December. A cut to 4 per cent would reduce the cost of repaying a $300,000 mortgage by $49 a month if fully passed on.

The Reserve Bank governor, Glenn Stevens, signalled the switch in a statement released after Tuesday's board meeting. Economic growth, previously thought of as "close to trend" had turned out to be "somewhat lower than earlier estimated".

Instead of growing at the 3.5 per cent forecast by the bank, the economy grew just 2.3 per cent in the year to December.

Nearly all the growth was in the coal- and iron ore-rich states of Western Australia, Queensland and NSW. Victoria, South Australia and Tasmania went backwards. Mr Stevens acknowledged the disparity, referring to "differences in performance between sectors".

The only thing standing in the way of a rate cut next month is a bad inflation result due on April 24.

Mr Stevens said the board thought it "prudent to see forthcoming key data on prices to reassess its outlook for inflation before considering a further step to ease monetary policy".

The explicit acknowledgment that the bank is preparing to consider easing rates policy is known in the markets as an "easing bias".

Futures traders are now pricing in an 80 per cent probability of a rate cut on May 1. Mr Swan welcomed the bank's statement saying it reflected "patchwork pressures in our economy with some sectors booming and others facing challenges".

Linking the easing bias to the forthcoming budget, Mr Swan said returning the budget to surplus would help "ensure the Reserve Bank has the flexibility to cut rates further - after two rate cuts last year - if it thinks that's necessary".

The shadow treasurer, Joe Hockey, said the governor's statement confirmed weakness in the economy and suggested it was not the time to impose a carbon tax that would drive up the price of everything.

Retail figures released as the board met show a nation divided, with next to no spending growth in NSW, Victoria, South Australia and Tasmania, offset by strong growth in Western Australia, Queensland, the Northern Territory and the ACT.

In the past year spending in NSW and Victoria has grown a mere fraction of 1 per cent. Spending in Western Australia has risen 9.25 per cent.

Retail prices climbed 1.6 per cent throughout 2011, suggesting the quantity of goods and services bought in Victoria and NSW has gone backwards.

Retail supplier Metcash yesterday announced plans to gut the Campbells Cash & Carry chain and slash head-office jobs, losing 500 staff.

It will close 15 Campbells stores and close or sell 15 of the Franklins supermarkets it bought last year.

The Bureau of Statistics says in trend terms spending on food has been flat for three months. Spending on household goods has been sliding for four months. Spending in clothes and shoes stores and in department stores is climbing.

 twitter Follow the National Times on Twitter: @NationalTimesAU

Most Viewed