RBA Holds at 7.25%, Signals Rate Cuts Next

The Reserve Bank of Australia validated market expectations, keeping interest rates at 7.25%. Much of the accompanying statement remained unchanged as Governor Glenn Stevens again highlighted “opposing forces”: tight credit, higher living costs (oil, food) and lower asset values act to subdue economic growth while the China-driven mining boom pulls growth higher. Still, Stevens remained adamant that inflation would moderate to below 3% in 2010 as previously forecast.

The real message was saved for the very last: Stevens concluded by saying that “with demand slowing, the Board's view is that scope to move towards a less restrictive stance of monetary policy in the period ahead is increasing.” With this statement, Stevens unequivocally told the markets that the RBA is planning to cut interest rates sooner rather than later. AUDUSD reacted strongly, dropping 54 pips in the first 10 minutes following the release.

DailyFX

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