RBA cuts by 100 bps to 4.25%

The Reserve Bank of Australia yesterday cut its official cash rate by 100 basis points to 4.25% as global economic conditions continue to deteriorate and commodity prices continue to fall.

The latest reduction was the fourth in four months, following a 75 basis point cut in November, a 100 basis point cut in October and a 25 basis point cut in September.

Expectations had centred around a 75 basis point reduction. The Australian OCR is now at its lowest level since December 2001.

“The Australian economy has been more resilient than other advanced economies, but recent data nonetheless indicate that a significant moderation in demand and activity has been occurring,” RBA Governor Glenn Stevens said.

“With confidence affected by the financial turbulence and a decline in the terms of trade now under way, more cautious behaviour by both households and businesses is likely to see private demand remain subdued in the near term. With that outlook, and with capacity pressures now easing, it is likely that inflation in Australia will soon start to fall. Global disinflationary forces will assist in this regard, though the depreciation of the exchange rate means that the decline of inflation to the target could take longer than would otherwise have been the case,” Stevens said.

“Weighing up the international and domestic developments of recent months, the Board judged that a further significant reduction in the cash rate was warranted now, to take monetary policy to an expansionary setting. As a result of today’s decision, the cash rate will be at its previous cyclical low point. Given trends in money market yields, most lending rates should fall significantly and will also reach below-average levels,” he said.

The Reserve Bank of New Zealand looks set to reduce its official cash rate by at least 100 basis points on December 4, with some big bank economists not ruling out a cut of 150 basis points.

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Posted: 3 Dec 2008

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