Economy stable, with a downward bias

This time 12 months ago, the Reserve Bank (RBA) shocked Australians when it lifted the official cash rate on Melbourne Cup day.

Recently, the RBA caught Australians’ attention once again, but this time for a very different reason.

At its October board meeting, the RBA made a significant shift by hinting it could cut interest rates before Christmas.

According to the minutes of the October meeting, the Reserve Bank is prepared to do whatever it takes to support our flagging economy and to boost waning business and consumer confidence.

Despite an improvement in August, confidence still remains incredibly weak.

According to the latest Westpac Melbourne Institute Index, consumer sentiment rose from 89.6 to 96.9 in September.

But while this movement came as a pleasant surprise to many industry commentators, RFi director Alan Shields says there is a still a long way to go.

“Research conducted by RFi shows people are more concerned about the state of the domestic economy and the state of the global economy now than they were during the depths of the GFC,” he says.

According to Mr Shields, the RBA’s decision to leave rates on hold for a prolonged period has not helped to improve the situation.

“We are at a place now where the RBA has not moved for the best part of a year and that makes people nervous – it creates uncertainty,” he says.

Whether or not the board does decide to trim the official cash rate from 4.75 per cent will now depend on the next round of inflation figures.

“An improved inflation outlook would increase the scope for monetary policy to provide some support to demand, should that prove necessary,” the minutes of the October board meeting read.

But what might qualify as ‘necessary’?

Some economists would argue a continuing unemployment rate of 5.2 per cent would be enough if the next inflation rate figure proves to be benign.

Similarly, ongoing debt problems abroad may force the Reserve Bank to cut rates in a bid to lift consumer confidence.

In fact, the global problems have already had a significant impact on the Reserve Bank.

If we cast our minds back to August, the RBA actually hinted it might raise rates before the silly season.

Since then, however, global financial markets have been hit by increasing fears that Europe will be unable to resolve its sovereign debt crisis without defaulting.

Investors have also been plagued by signs the US may go back into recession and fears over the Chinese property market.

Whether or not the RBA reacts and trims rates remains to be seen, but one thing is clear: things have changed since November 2010.