Reserve Bank of Australia Cuts Official Cash Rate (OCR) to 4.5%

November 1, 2011

The RBA eased monetary policy for the first time since a 25-basis point OCR cut in April 2009 culminated a six-step 425 basis point easing from September 2008.  Today’s reduction was also by 25 basis points.  Aggressive monetary and fiscal stimulus as the world economy sank into the Great Recession enabled Australia to be among very few advanced economies to avoid an outright economic contraction, and rate normalization began in October 2009.  Six more rate hikes followed by November 2010, all seven being by 25 basis points. 

In a statement released today, the Reserve Bank of Australia Board, led by Governor Glenn Stevens, explained the directional reversal as follows:

Over the past year, the Board has maintained a mildly restrictive stance of monetary policy, in view of its concerns about inflation. With overall growth moderate, inflation now likely to be close to target and confidence subdued outside the resources sector, the Board concluded that a more neutral stance of monetary policy would now be consistent with achieving sustainable growth and 2–3 per cent inflation over time.

Some other specific points made in the statement are

  • Global growth has so far not experienced a major downturn.  Fear of such has weighed on confidence.
  • China’s growth has slowed as a result of policy intent.
  • “It is likely to be some time yet before concerns about the European situation can definitively be laid to rest and the effects of the recent turmoil on confidence may result in a period of precautionary behaviour by firms and households.”
  • Australia’s terms of trade “remains very high” but has crested finally.
  • “Cautious behaviour by households and the high exchange rate have had a noticeable dampening effect” on the Australian economy, which is experiencing “moderate growth overall.”
  • Because of base effects related to bade weather last summer, on-year inflation exceeds target.  Inflation will fall as such drops out of year-over-year comparisons and because of softer labor market conditions, subdued demand conditions, and the high exchange rate.

The next RBA policy announcement will be released December 5.  The Board meets monthly except in January, when it’s summer down under.

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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