The RBA Just Cut Interest Rates And Lots Of Analysts Have Egg On Their Faces

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Big surprise.

The Reserve Bank Of Australia just announced a cut of 25 basis points to the target cash rate — it’s now at a record low of 2.75%.

The 13 economists surveyed by AAP last week forecast no change; in a Bloomberg survey of 29 economists only eight picked a cut. Many commentators today were still predicting a hold.

The Aussie dollar fell by a full cent against the greenback — it’s now approaching parity with the USD. The ASX had been sagging for the day but saw a big spike on the announcement.

In its statement today the Reserve spends a lot of space outlining the strengths of the economy and finally arrives at the rationale for the cut in the cash rate in the final two paragraphs.

The exchange rate, on the other hand, has been little changed at a historically high level over the past 18 months, which is unusual given the decline in export prices and interest rates during that time. Moreover, the demand for credit remains, at this point, relatively subdued.

The Board has previously noted that the inflation outlook would afford scope to ease further, should that be necessary to support demand. At today’s meeting the Board decided to use some of that scope. It judged that a further decline in the cash rate was appropriate to encourage sustainable growth in the economy, consistent with achieving the inflation target.

Inflation was lower than expected in the last quarter and Goldman Sachs pointed out that prices had suprised on the downside in five of the last six quarters. The GS team pointed to the lack of inflationary pressure giving scope for rate cuts and adjusted its forecast to back a rate cut this month.

The RBA goes to some lengths to enumerate the positive signs for the domestic and global economy. Here’s a summary:

  • The US economy is in moderate expansion; China is growing at a “more sustainable, but still robust, pace”;
  • Commodity prices have “moderated” but remain at historical highs;
  • Financial conditions globally are “accommodative”, with borrowing costs low;
  • Growth both internationally and domestically is a little below trend;
  • Employment has continued to grow “but more slowly than the labour market” — hence the uptick in unemployment;
  • Consumption has strengthened and there has been a “modest firming” in the housing market;
  • Exports are increasing thanks to increased capacity;
  • Inflation is consistent with targets but has been “pushed up a little” by the carbon price;
  • Labour costs have eased and productivity growth “appears to be improving”, and
  • The effects of the low cost of borrowing are “continuing to emerge” in the economy.


After all that, the decision was for a cut. As the old saying goes: don’t listen to what they say — look at what they do.

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