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RBA Board debates rates -

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BRENDAN TREMBATH: The case for a cut in official interest rates as early as next month has been
strengthened after the signal sent by the Reserve Bank today.

According to a summary of the central bank's most recent meeting, concerns about rising inflation
appear to have prevented a rates cut a fortnight ago.

At the same time, the Board acknowledged that because of sinking economic conditions, a case could
be made for an early rates reduction.

Business editor Peter Ryan has been studying the minutes in a special lockup at the Reserve Bank in
Sydney, and he joins me now.

Well, first to inflation - how seriously, Peter, does the Reserve Bank judge the inflation threat
as a barrier to rate cuts?

PETER RYAN: Well Brendan, the Reserve Bank has made it very clear that inflation remains a big
economic threat, and if anything, the language is stronger. It's actually the first agenda item
fleshed out in today's minutes, whereas in July, it was in second place after the world economy.

The Board makes it clear that with inflation set to peak at five per cent in the December quarter,
it was the key argument for keeping rates at 7.25 per cent at the August meeting.

The Board also says there's an attendant risk to wages growth, although that's not evident just
now. But if wages did break out, they say "the cost of reducing inflation later would be greater".
In other words, as long as inflation is on the agenda, there is always a risk that rates might have
to be tightened, further down the track.

BRENDAN TREMBATH: But the Reserve Bank, does it acknowledge that the economy is slowing? How
delicate is this balance?

PETER RYAN: Well the Board certainly acknowledges that the economy is slowing and there's quite an
escalation in the language used, the Board acknowledges that financial conditions are "clearly
quite tight", and getting tighter because of rate rises independent of official movements by the

It also says there's been a "significant change in borrowing behaviour" and asset prices have
declined, and because of that - some key words here - "tighter financial conditions were not
warranted at the last meeting", and the board goes on to say "that less restrictive conditions
could be soon be called for", note the word 'soon'.

So based on these considerations, a case could be made for an early reduction in the cash rate and
by early, that looks like next month or slightly beyond.

BRENDAN TREMBATH: Taking a bigger look at the whole world, do the minutes provide any insight on
the state of the world economy?

PETER RYAN: Yeah, the Board regards conditions in major economies around the world as generally
weak, especially in the United States.

The previous minutes that I updated on just before going into the meeting did show an element of
optimism that the credit crisis was easing, but today's minutes refer to the US mortgage giants
Fannie Mae and Freddie Mac, which are now at the centre of the US housing slump, and that's a
critical point, given that they guarantee a collective $6-trillion of mortgages in the United

It makes a mention of a slowdown even in China, though that is not as pronounced, but the Board
makes mention of the deteriorating situation in the United Kingdom, Europe and Japan.

BRENDAN TREMB ATH: Many people would be worried about their mortgages, what's happening there. Now
we saw some very direct comments last week from the Reserve Bank about the need for banks to pass
on any rates cut. Is there any reference to that in the minutes?

PETER RYAN: Well, there's no direct tap on the shoulder, even though the Reserve Bank's language
has been getting much more direct in recent months, but the minutes make the point that the
independent rises by the banks are hurting and having an effect on tempering demand.

It does note that banks have increased their standard variable housing rate by 15 basis points in
the past month, and that's at a time when the 90 day bank bill rate is falling, and that was
pointed out last Wednesday by the assistant RBA governor, Philip Lowe, who said there was no
obvious reason for banks not to pass on the rates cut.

BRENDAN TREMBATH: Business editor Peter Ryan, thanks very much.