RBA Cuts by 100bps to 4.25%, Another 50bps Still Expected in 1Q09

The RBA cut the cash rate by 100 bps to 4.25% after the December Board meeting. This is the nation's biggest reduction in interest rate since 1991. There had been a wide range of market expectation for the rate decision with the majority predicted a 75 bp cut. Over the last four months, the central bank's monetary policy reversed from tightening to easing and has accumulated rate cut of 300 bps.

There are a few points worth noting in the accompanying statement.

1. The RBA said that monetary policy is expansionary.
2. Reduction in key lending rates over the past few months, as well as other spending measures announced by the government and deprecation in Australian dollar, should support demand over the coming year.
3. However, as global economic condition, as evidenced by economic data released, continues to deteriorate, uncertainty remains. More cautious behavior by both household and business is likely to see private demand remain subdued in the near term.
4. Although the Australian dollar has depreciated, disinflationary forces in global context would cause inflation in Australia to fall soon.

RBA's decision was well-received by major banks in Australia. Both CBA and NAB will pass through all of the cut while Westpac will pass on 0.8%.

The agressive rate cuts from RBA so far is seen as pre-emptive as it happened ahead of decline in nomial GDP and is relatively ahead of the uemployment cycle. While the the policy easing are seen as supportive to the economy, it's inevitable that as the global economic outlook continues to deteriorate, the impact on Australia from the credit crisis will intensify. Hence while some speculate that RBA is signalling an end to its policy easing cycle, it's believed that RBA is not done with rate cuts yet and it's only the pace of that will slow in the coming quarters.

In short RBA is still expected to have another 50bps cut in 1Q09 and probably another 25bps by end of 2Q09.