Australia Cuts Interest Rates by 1%, RBA Signals Easing Over

The Reserve Bank of Australia cut interest rates by a greater-than-expected 100 basis points, bringing borrowing costs to six-year low at 4.25%. As had been suggested in the minutes from the bank's last meeting, RBA policy will shift to neutral going forward. The statement accompanying the release offered now familiar cautionary rhetoric about the dire state of the global economy but concluded with the most clear signal yet that the current rate cut cycle has concluded. Governor Glenn Stevens said that “a major easing in monetary policy…together with spending measures announced by the Government and a large fall in the Australian dollar” will support demand over the year ahead. Stevens further said that the bank will “make adjustments as needed to promote sustainable growth consistent with achieving the 2–3 per cent inflation target.” Put simply, this means that the RBA is not ruling out raising rates should the current disinflation reverse course.

Stevens had previously suggested that the impressive magnitude of recent rate cuts, a full 3% since early September, was designed to quickly offer the necessary stimulus without extending rate cut expectations too far into the coming year. The reasoning behind this seems to be the inflationary effect of the sharp depreciation in the Australian dollar. Entrenched rate cut expectations would put continued pressure on the Aussie, making it harder for the bank to strike the right balance between boosting growth and bringing inflation back within the target range. This looks to have moved the RBA to favor a “big bang” rather than a gradual approach to monetary boost.

DailyFX

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