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RBA flags end of interest rate cuts -

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RBA flags end of interest rate cuts

Reporter: Peter Ryan

PETER CAVE: Well, the Reserve Bank has given its strongest indication yet that the dramatic
interest rate cuts of the past six months might be over, for the time being at least.

The minutes of the central bank's latest meeting also confirm the decision to cut a quarter of a
percentage point was a close call, although further reductions can't be ruled out.

Unlike the Prime Minister, the bank is not using the R-word directly but it has been told that
Australia will almost certainly fall into an official recession.

Our business editor Peter Ryan has been analysing the minutes in a special lockup at the Reserve

They've let him out and he's joined me in the studio.

Peter, what was this about a difference between the board members on cutting rates?

PETER RYAN: Well Peter, the minutes make it very clear there was one big question for the board
when they met a fortnight ago and was there a case for an additional easing, given that rates have
been cut by 4.25 percent points since September.

And board members were reminded that interest rates on loans are now at historical lows - 49 year
lows, at three per cent.

And also the debt servicing burdens have eased considerably, particularly for households which were
suffering a lot of mortgage stress this time last year.

The board also heard that recent fiscal stimulus - which totals more than $50-billion, provided by
the Federal Government - would also boost demand and help foster a recovery, possibly by the end of
this year.

So, the arguments seem to be whether the board should do nothing or do something quite dramatic to
make a statement, such as a 50 basis point cut, and it seems they've split the difference on this
occasion and cut by 0.25 of a per cent.

PETER CAVE: Well, the Prime Minister has finally uttered the R-word that he had to utter. Was that
part of the debate within the bank?

PETER RYAN: Well, it would have really fuelled debate inside the boardroom a fortnight ago when the
business members of the board, including corporate heavyweights like the former Woolworths chief
Roger Corbett, most likely argued business was sinking and that a rate cut was in order.

That view was backed by advice to the board shown in minutes of the very sharp decline in the
December quarter in growth, and that had almost certainly been repeated in the March quarter.

That means two negative quarters of economic growth, and that means a technical recession. They
didn't use the word 'recession', by the way.

But in the end the Board decided the near term outlook was quote 'weaker than expected' and a
'modest' reduction was in order.

PETER CAVE: You've been through those minutes with a fine-tooth comb in the lock- up. Was there
anything in there, a glimmer of hope for another rate cut, do you think?

PETER RYAN: I was looking very closely, and found no major hints. But the language certainly
suggests that a pause might be the go at the moment, and the board noted that consumer sentiment in
Australia had fallen less than other major economies, and that in general, the news here was less
worse than expected.

The housing sector here is still very weak, although there is increasing demand for first home

Business investment grew in the December quarter, although that's been scaled back.

But of course the labour market remains weak, with unemployment expected to easily exceed seven per
cent in the coming months.

So, balancing some positive times here with the gloom in the United States, Europe and Japan, and
of course China, it seems the Reserve Bank may well have decided to keep its powder dry for much
later in the year.

So this could be a pause, although most economists believe official rates could still fall to two
or 2.5 per cent by the end of the year as unemployment really starts biting.

PETER CAVE: We're seeing the Commonwealth and Westpac increase their fixed rates. Does the board
make any comment about the cost of money for the banks?

PETER RYAN: The board has been told that spreads on short-term debt has eased considerably, that
banking conditions have improved.

But of course, banks are looking to long-term debt markets for fixed rates and that's caused the
recent rise in fixed term rates.

Even so, the minutes show demand for Reserve Bank funds have declined, meaning there's less
pressure on banks.

But some of these comments would also weigh into the current PR war that banks are having with the
Prime Minister and the Treasurer.

PETER CAVE: Peter Ryan, live in the studio, just out of the lock-up of the Reserve Bank down in
Martin Place. Is that right? Is it still there?

PETER RYAN: That's right, the Reserve Bank, Martin Place in Sydney. And it was very nice to be
locked away without any mobile phone conversation for an hour.

PETER CAVE: Gee thanks Peter.