Posted on February 3, 2015 by the XM Investment Research Desk at 2:04 pm GMT
The news that the Reserve Bank of Australia cut interest rates by a quarter point was a surprise to most analysts, although the move had been widely rumored and speculated by the markets. The cut brought the Overnight Cash Rate (OCR) to 2.25% – an all-time low – and there was a high probability that the RBA would cut by an additional 25 basis points when it next meets in March. As recently as December, the RBA had hinted that rates would remain on hold for the foreseeable future.
The main factors of the RBA decision were that economic growth was going to be below trend for a longer-than-expected period and that unemployment would climb to a higher point. The Reserve Bank has been complaining about deteriorating terms of trade and for the need for a depreciation of the local currency in order to partly compensate this effect. Iron ore for example, one of Australia’s key commodity exports, has seen its price nearly halve during 2014. A related issue that the Australian economy is faced with is that China’s economy is slowing down from very rapid economic growth rates in previous years and this will reduce demand for Australia’s exports. Finally, the government’s fiscal austerity plans have also depressed economic sentiment.
The one risk that the RBA is taking is that an overheating housing market in the main metropolitan areas could be encouraged further from such monetary stimulus.
The action by the RBA is part of a pattern observed recently that countries with heavy commodity exports are opting towards monetary stimulus to boost their economy. The Bank of Canada also recently cut interest rates and the Reserve Bank of New Zealand has decided to switch to neutral from tightening mode.
The monetary policy statement that will be released on Friday could clarify the RBA’s intentions as well as offer a more detailed assessment of what is happening inside the country’s economy. The Australian dollar dipped to its lowest since May of 2009 to 0.7625 against the US dollar. The financial crisis low for the aussie was 60 cents in 2008, although the 75 US cents target that the RBA expressed as a fair price for the aussie in previous months is looking increasingly within reach.