Reserve Bank of Australia Cuts Cash Rate By Another 75 Basis Points

November 4, 2008

A reduction of the cash rate to 5.25% from 6.0% surpassed consensus expectations for a 50-basis point rate cut. The 100-basis point cut in October also was greater than expected. Within just two months, the Reserve Bank has unwound two-thirds of the 300 basis points of tightening that took five years and ten months to implement. No major central bank has unwound restraint more rapidly than Australia’s. The closest has been the Reserve Bank of New Zealand, which cut by 175 bps in three months. The Fed had cut rates more deeply, 425 basis points in all, but stretched the shift over 13 months. The Bank of Canada has eased 225 basis points but over 10.5 months.  Likewise, the Bank of England also took 10.5 months to cut rates by 125 bps, although that will jump to at least 175 bps on Thursday. The ECB and Bank of Japan only started easing last month and with first steps of 50 bps and 20 bps, respectively. The easing of monetary conditions in Australia has been greatly amplified by Aussie dollar depreciation of some 32% during the past three months.

The Reserve Bank of Australia’s latest statement contends that A-dollar declines, a fiscal stimulus package, and lower borrowing costs will lend the economy some support but not forestall spending and activity from being slower than earlier expected. Cited depressants included significantly weaker growth in other developed economies, compounded by signs of a slowdown too in China and other developing economies and by a drop of Australia’s terms of trade due to the slump in commodity prices. Officials expect inflation to be falling soon in response to weaker Australian activity and global disinflationary forces. More easing will be forthcoming if needed to achieve 2-3% inflation over the longer term.

The series of asset bubbles stems in part from an asymmetry between the speed of monetary easing and monetary tightening. Australia’s history of rate changes exemplifies that bias, but the most serious instance involves the Fed, which took 2 years to raise rates from 1% to 5.25% but just 13 months to cut such back to 1.0%.



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