A Surprise Easing at the Reserve Bank of Australia

October 2, 2012

The RBA’s Official Cash Rate has been sliced by another 25 basis points to 3.25%, its lowest level since October 2009 and just 25 bps above the Great Recession low.  Today’s was the first reduction since a 25-bp move in June.  Before then, The OCR was also cut by 50 bps in May, and by 25 bps each in November and December of 2010.  A peak of 4.75% had been maintained for a year previously.

A statement released today justifies this shift to a policy that is “a little more accommodative” by making the following points

  • Even though the disinflationary effects of A-dollar appreciation are dissipating, in-target inflation is projected to continue because of moderate labor market conditions and improved productivity.
  • Officials have cut their baseline view of future global growth and still attached downwardly skewed risks to that forecast.
  • Australia’s terms of trade (export/import price ratio) is 10% below peak already and still falling.  As a resource-intensive economy, Australian incomes and domestic spending tend to correlate with the terms of trade.
  • Australia’s economy is growth at around, but not above, trend.
  • Credit growth has softened, and the Aussie dollar remains higher than warranted by fundamentals.

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

Tags: ,


Comments are closed.