Reserve Bank of Australia rate cut – not like cockroaches

Yesterday the RBA cut its key cash rate for the first time since 7th April 2009 – the last rates move was exactly a year ago (2nd November 2010) when rates went up by 0.25% to 4.75%. The cut amounted to 0.25% which leaves the key rate at 4.5% – a very high rate by international standards. The graph below shows that the US, Euro zone, and Japan have engaged in an aggressive expansionary monetary policy by lowering interest rates. Whilst Australia has experienced higher interest rates as its economy has grown at rate which has put pressure on its productive capacity and ultimately inflation.

Typically the RBA has cut or increased interest rates over a long period of time so are further cuts to follow? Sydney Morning Hearld economics correspondent Peter Martin likened these series of cuts/increases to cockroaches – there is never one of them. However he believes that this cut is a one-off and that the RBA has reached its neutral interest rate – that rate which is neither expansion or contractionary to the Australian economy. Here is the last paragraph of RBA Glenn Stevens’ statement:

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.

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