Australia’s 50-Basis Point Rate Cut

May 1, 2012

The RBA Board cut the official cash rate to 3.75%, lowest in 26 months, beating expectations of a 25-bp reduction.  Policymakers in a statement of explanation said this larger-sized move would “be necessary in order to deliver the appropriate level of borrowing rates” and was “appropriate” in light of moderating inflation and somewhat weaker-than-expected economic conditions.  Enumerated drags on growth are

  • A persistently elevated Australian dollar.
  • Skittish financial market sentiment.
  • Modest credit growth.
  • A subdued housing market.
  • Last year’s weather-driven rise in food prices.
  • The terms of trade no longer are cresting.

Inflation is expected to range in the central bank’s target between 2.0% and 3.0% in 2012 and 2013.  Between the third and fourth quarters of 2011, real GDP expanded 1.7% at an annualized rate, but calendar year growth in 2012 is likely to be nearer 3%. 

The cash rate was reduced from 7.25% prior to September 2008 to a low of 3.0% from April 2009 to October 2009.  This easing was followed by 7 increases of 25 bps each between October 2009 and November 2010.  The first two reductions in the current easing cycle were implemented in November and December and each of 25 bps in size.  Today’s 50-bp cut was the third move of the easing cycle.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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