Last week the Reserve Bank of Australia cut interest rates by 50 basis points. They cut rates from 4.25 per cent to 3.75 per cent – the biggest move since the peak of the global financial crisis in early 2009. This is a rather large cut by international standards as increases and decreases in the rates of central banks worldwide tend to be 25 basis points. However the RBA is worried about the lack of impact on domestic demand and confidence that cuts had last year. Therefore they felt that a more significant cut was warranted to stimulate more growth in the economy.
Also the RBA are worried about the strength of the AUS$ and the impact it is having on manufacturing and service exports. Although the mining sector is going along quite nicely there is concern about the domestic service and non-mining sectors as investment has been quite weak. Other data has showed that house prices have fallen 1.1% in the first quarter of 2012 and that lending rates have risen 0.1% and the cut in the cash rate will probably not be passed on to those borrowing.
Although some say that the RBA might be ‘behind the play’ you do have to remember that in Australia (unlike NZ and other economies) they don’t have monthly CPI figures but quarterly. Therefore they have to wait for a quarterly result to have any idea of where inflation is heading.