Cash Rate cut to 2%; no surprise to anyone

As had been almost universally expected, the RBA today decided to shave another 25 basis points off the official Cash Rate to take it to a new low of 2.0%.

In the press release announcing the decision (available here) the Board notes that commodity prices remain low, and CAPEX is likely to remain low for the coming year. Despite better household demand and stronger employment data the Bank believes that spare capacity remains in the economy and the inflation genie remains well and truly in its bottle. Thus, “so as to reinforce recent encouraging trends in household demand“, the cut today.

What is perhaps telling is that the announcement gives no sign at all of any further cuts into the future. The Bank will be rather disappointed that, post the decision, the A$ has strengthened somewhat against the US$. This is almost certainly simply a “sell the rumour, buy the fact” response to a move that had been widely expected. The Bank will certainly be hoping that this cut. combined with pressure for the Fed to start moving on US rates later this year, will shift the Aussie back down, given that “further depreciation seems both likely and necessary“.

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