Europe concerns weighed heavily on RBA: Westpac's Bill Evans

Westpac chief economist Bill Evans says European concerns weighed heavily on the minds of the Reserve Bank board members in their decision to cut the cash rate by 25 basis points to 4.25%.

Evans says a big difference in the December monetary policy statement compared with that made in November are to do with “global developments, specifically around Europe”.

“Whereas in November the governor referred to European governments ‘making progress’ he now talks about ‘still seeking to craft a full response’,” Evans says.

“He also introduces the important dimension of financing conditions referring to them being ‘much more difficult’ and indeed does not only refer to European entities but also talks about for Australia ‘term funding conditions have become more difficult’.

“He concludes that there is now ‘the likelihood of a further material slowing in global growth has increased’. We also see specific recognition of the reversal in commodity prices which not only reflects weaker global but also takes some further pressure off inflation.”

In addition to the comments about Europe, Evans says the key reasons behind the move were also consistent with the bank’s observations.

“The statement by the governor had many similarities with the statement on November 1, when he outlined the reasons for the decision to cut rates from 4.75% to 4.5\%. This covered issues such as: China's growth slowing as intended; a moderation in the pace of global growth; Australia's growth around average levels; strong investment in the mining sector; cautious behaviour by households; unemployment close to 5%; wage pressures easing; and of course inflation likely to be consistent with the 2 to 3% target in 2012 and 2013.”

Evans says Westpac remains comfortable with its July forecast that the easing cycle would cover 100 basis points, with the last rate cut being around the middle of 2012.

“We are comfortable maintaining that view and see nothing in this statement to suggest that the bank rules out any further adjustments.

“Indeed we do not expect to see developments, either global or domestic, over the course of the next three months that would allay the concerns which have clearly motivated the bank's recent two decisions. We would expect the next move to be February being a 25-basis-point cut to be followed a further reduction in May,” he says.

ANZ also forecast the RBA to cut rates today.

Katie Dean, head of Australian economics at ANZ Research, says the bank now expects the RBA to cut the cash rate by a further 25 basis points, to 4%, at the February 2012 board meeting.

“With global risks likely to remain heightened (and still potentially worsen), the Australian price pressures well contained, and domestic unemployment still likely to head higher, we see little risk that domestic inflation will be ignited by the further boost to growth afforded by another modest monetary policy easing,” she says.