Reserve's December rate cut a close call

The Reserve Bank has signalled that its decision earlier this month to cut official interest rates was a close call.

In the minutes from its monthly meeting on December 4, released today, the RBA board cited a softening labour market, moderate inflation and an approaching peak in the resources boom as key reasons for taking the cash rate to 3 per cent.

However, the decision a fortnight ago to cut the cash rate to the lowest level since April 2009 - at the height of the global financial crisis - was tempered by the stabilisation of China's economy and moderate economic growth in the United States and steady financial markets.

According to the minutes, while those factors provided a case to cut rates, "the board considered whether to respond to this case in the near term or wait for further information." The minutes also confirm that a previous decision to leave the cash rate on hold in November was driven by "slightly higher-than-expected" inflation data in the September quarter and "somewhat better information about the world economy".

While the minutes do not directly signal additional cuts in 2013, they repeat earlier comments that "further easing might be appropriate in the new year." Financial markets are factoring in a strong likelihood that the cash rate will fall to 2.75 per cent when the RBA board next meets in February.

Yesterday, , taking it to levels not seen since the Reserve Bank began targeting inflation.

However, doubts are already emerging that commercial banks will pass on future rate cuts in full as they continue to fund customer deposits which now outweigh residential mortgages.

The RBA highlighted the diminishing benefits to mortgage borrowers noting that, "lending rates were now clearly below their medium-term averages, although they remains above levels reached in 2009." While global conditions were "a little more positive", the RBA board confirmed there was "still considerable uncertainty" about the budget crisis in the United States known as the fiscal cliff.

"This appeared to be weighing on business sentiment, with indicators of investment, in particular, remaining subdued," the minutes noted.

The RBA's December meeting took place before the most recent official growth and employment data became available.

GDP growth in the September quarter fell slightly to 0.5 per cent and 3.1 per cent over the year, but the jobless rate for November also unexpectedly fell to 5.2 per cent.

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