Australia: RBA unexpectedly cuts rates to historic low, shows concern for strong AUD
May 7, 2013
At its 7 May meeting, the Reserve Bank of Australia (RBA) cut the cash rate by 25 basis points to 2.75%, in a decision that surprised market analysts. The move, which brings the rate to a historic low, marks the first cut following three consecutive meetings in which the RBA kept the policy rate unchanged.
According to the RBA, economic activity at a global level will be below average this year, but pick up over the next. At a domestic level, while the peak in resources investment is approaching, the Bank sees signs of improvement in non-resources sectors, favoured by the easing cycle started 18 months ago. In particular, consumption and dwelling investment have strengthened, and "prospects are for some increase in business investment outside the resources sector over the next year".
Regarding price developments, inflation is in line with the Bank's target and is expected to stay consistent over the next one or two years. Monetary authorities, however, appear concerned regarding the current high level of the Australian dollar (AUD), which "has been little changed at a historically high level over the past 18 months". According to the RBA, the situation is "unusual given the decline in export prices and interest rates during that time".
The subdued inflation outlook provided a rationale for the decision, as the RBA already announced in previous statements that it would cut rates to stimulate demand when prices would provide scope for it. According to analysts, the part of the statement referencing the AUD suggests that the strong currency was a key motivation for the decision. FocusEconomics Consensus Forecast panellists expect the cash rate to end 2013 at 2.92% and to rise to 3.38% by the end of 2014.
Author: Armando Ciccarelli, Head of Data Solutions