Reserve Bank of Australia Reduces Cash Rate 25 Basis Points

April 7, 2009

After a one-month pause in March, Australia’s central bank implemented the sixth rate cut since September but opted for a reduction of only 25 basis points to 3.0%.  The four prior cuts had been moves of 100 basis points in February, December and October and of 75 basis points in November.  The initial easing on September 2, 2008 had also been a move of just 25 basis points.  The cash rate was last as low as 3.0% in March 1960.  Officials are counting on 425 basis points of rate cuts in the pipeline as well as two big fiscal packages already passed and a third expected in next month’s budget to limit Australia’s recession to a much milder event that those experienced by many other economies.  Officials are also heartened that China’s slowdown seems to have passed an inflection point.

A statement from the central bank projects inflation at a lower level than it has been amid less capacity usage and weakening labor demand.  Credit demand is observed to be weak overall but picking up in the housing market.  In contrast to the prior rate cut in February, when monetary officials called “a further sizable reduction in the cash rate appropriate,” today’s statement saw only “scope for a further modest adjustment to the cash rate.”  Should their optimism not be borne out by future growth, officials have left themselves room to re-accelerate the aggressiveness of their easing.  In any case, 3.0% seems unlikely to be the lowest rate level of this business cycle.

Copyright 2009 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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