Monday, December 5, 2011

Reserve Bank of Australia Cuts Rate 25bps to 4.25%

The Reserve Bank of Australia (RBA) cut the cash rate by 25 basis points to 4.25% from 4.50% previously.  The RBA said: "Overall, the Board concluded, on the basis of all the available information, that the inflation outlook afforded scope for a modest reduction in the cash rate. The Board will continue to set policy as needed to foster sustainable growth and low inflation over time."  The Bank cited the risks of slowing growth in China, and sovereign credit and banking problems in Europe, as well as declining commodity prices; as posing downside growth and inflation risks.


The Bank previously held also cut the cash rate by 25 basis points at its November meeting, meanwhile the RBA last increased the interest rate by 25 basis points in November last year.  Australia reported annual consumer price inflation of 3.5% in Q3 this year, compared to 3.6% in Q2, and up from 3.3% in Q1, and 2.7% in the December quarter of 2010, and just outside the Bank's inflation target of 2-3%.  

The Australian economy expanded 1.2% in the June quarter, after contracting -0.9% during the March quarter due to the impact of natural disasters; placing year on year GDP growth at 1.1% in the June quarter, and 1.2% in the March quarter.

Following the announcement the AUDUSD dropped from about 1.0238 to as low as 1.0167.  
The Australian dollar (AUD) has gained about 1% against the US dollar so far this year, after reaching parity and climbing as high as 1.10 this year; the AUDUSD exchange rate last traded around 1.019

The RBA next meets on the 7th of February next year, and will release its December meeting minutes on the 20th of December.

9 comments:

  1. What are your thoughts on this move? The European debt crisis has really been a monetary policy game changer. But for Australia, the China factor is also of critical importance. So will this be the last rate cut? A lot may happen between now and February the 7th 2012...

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  2. Good on the RBA for taking this step, if you think about the Australian economy it's basically got two major themes going for it:
    1. China's huge demand for resources (and the associated mining sector boom); and 2. A massive bull run in the housing market and significant expansion of property related credit (and the associated banking sector boom). The European debt crisis will raise bank funding costs, and the slowdown in China will hit demand... these are significant risks for Australia, so I would not be surprised to see more monetary easing!

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  3. Yeah, the key contingency in my view is Europe. If Europe can paint over the cracks well enough, it will alleviate some part of the China side (global export demand) as well as the funding costs aspect. Anyway, China will be fine, the leadership is about to change there and the transition usually features a swath of infrastructure investment programs. Plus China has a lot more leavers to pull in terms of stimulating its economy. My base case is Europe somehow gets through and China will not see a hard landing; meanwhile the US will continue its rocky recovery. Problem?

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  4. Yeah China will be fine - until it's property market crashes! Already real estate prices in *real terms* are plummeting in China. That will hurt consumer wealth, local government revenue, and construction, not to mention banking.

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  5. They should have done 50bps, anyway, current market pricing sees the rate at 3% early next year (obv. contingent on global outlook)

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  7. @US Private Investigator ... well you win the award for most inane comment, why don't you try writing something about the post in your comment?

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  8. lol... not long now until the main event, ECB in just a few more hours now; will the ECB go nuclear?

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  9. Hi Econ Grapher, most people are picking a 25 basis point cut from the ECB, with a handful picking 50 basis points or more (maybe even a ZIRP?). The nuclear option would be a drastic scaling up of the SMP, or the announcement of a significant quantitative easing program. Much of course will depend on how the ECB sees the next couple of days going as Europe meets for its critical sumit.

    Stay tuned for an instant update here from us!

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