Big cut as expected but no clear hints on outlook
By Garry Shilson-Josling, AAP Economist03 Feb 2009 3:14 PM
SYDNEY, Feb 3 AAP - The Reserve Bank of Australia's (RBA) decision to lop a full percentage point off its policy interest rate was well anticipated, but there were no clear pointers for the outlook from here.
The RBA said its board had on Tuesday decided to cut the cash rate to 3.25 per cent, a 34-year low, from 4.25 per cent.
Prior to the announcement market economists had mostly expected a 100 basis points (one percentage point) cut, although a minority were looking for 75.
Traders in the money market had been a little more hopeful, with futures prices balanced mid-way between a 100 basis point cut and a bigger move of 125.
As a result, the Australia dollar blipped up by half a US cent to around 64 soon after the news and March bank bill futures slid 14 ticks to around 97.23, reflecting a slightly less bullish trajectory for the cash rate in the coming few months.
The factors underpinning the RBA's decision were no surprise - the worsening global outlook, a slump in confidence domestically and an expectation that inflation will continue to decline.
The RBA said its decision had taken account of the fiscal stimulus package announced on Tuesday.
The package announced by prime minister Kevin Rudd as the RBA's board met brought the total impact of policy decisions since the budget last May to $68 billion over four years, including $29 in the current year and $20 billion in 2009/10.
"The combination of expansionary monetary and fiscal policies now in place will help to cushion the Australian economy from the contractionary forces coming from abroad," the RBA said.
The size of the fiscal stimulus and the lack of any obvious hint about the outlook for rates may induce some caution among money market bulls.
Still, there is plenty of scope for further cuts - the cash rate may be at its lowest since early 1965 but it is still only about 2.4 percentage points below the average for the modern era of inflation targeting.
And the economic circumstances are dire.
