Reserve Bank of Australia Cuts Cash Rate to 4.25% From 5.25%

December 2, 2008

The 100-basis point reduction was slightly above consensus, although matched several forecasts including my own. There have been four cuts since September 2nd, totaling 300 basis points. The new 4.25% level matches the last cyclical low from Dec 2001 to May 2002 and is 50 basis points lower than the prior two cyclical lows of 4.75% from July 1993 to August 1994 and again from December 1998 to November 1999. The statement ends with the same sentence as the statement released on November 4th, suggesting that more easing will be undertaken in the future.

The new statement by RBA Governor Stevens observes fragile financial market sentiment, weak conditions in major advanced economies, a significant slowing in many emerging countries, a significant moderation in Australian demand and activity, lessening capacity pressures, and global disinflation. Sub-trend growth and declining inflation are predicted. All of this was said at the time of November’s rate cut and in the subsequent quarterly Statement on Monetary Policy, but today’s communique breaks ground in two respects. Previously, officials spoke of returning policy to a neutral stance, that is one that neither promotes nor restrains growth. The new goal is to go a step beyond that point and “take monetary policy to an expansionary setting,” although it is not indicated if neutrality is represented at 4.25%. What is said is that a “major easing of monetary policy over the past few months” has been implemented and that such should support Australian aggregate demand over the coming year, along with a large fall in the Aussie dollar and pro-growth fiscal measures. The other fresh though is a reminder that “most lending rates should fall significantly and also reach below-average levels.” The inclusion of that prediction is actually more of a command than a reminder and reflects frustration that prior cuts in the cash rate have not been passed on in bank lending rates to the extent that monetary officials would have hoped.

Future actions by the Reserve Bank will be guided by global and domestic economic developments. Confirmation of a drop in inflation would seem to be a needed condition to proceed further at this stage, but there is no reason not to expect such occurring. In a week of several central bank interest rate policy meetings, Australia has set a high standard, especially since the decision to cut rates by as much as 100 basis points was justified in large part by global, rather than domestic, circumstances. The onus is now on the ECB. A reduction by it of 50 basis points, the same as in October and November, will be tough to justify in a credible way.



One Response to “Reserve Bank of Australia Cuts Cash Rate to 4.25% From 5.25%”

  1. Alfonso says:

    This week is turning out to be a major week for Central Banks around the World. BOJ holding an emergency meeting. RBA already cutting 100 basis points. RBNZ with a forecasted cut of 150 bps. ECB and BOE next in line.

    I agree that a 50 basis points will not be meet with enthusiasm by the market. Then again the ECB has always moved slowly and carefully with every rate decision.

    Great post