Event
The Reserve Bank of Australia (RBA) cut interest rates by 25bps to 3.25% at its October Board meeting.
Impact
The RBA cut its policy interest rate by 25bps at the October Board meeting. Just as important as the interest rate decision itself, however, was the language explaining the decision. And while the RBA obviously has to concede that the economy is not fantastic given that it has just cut rates, the concessions about growth that the RBA did make were modest.
Importantly, the RBA now acknowledges that the peak in resource investment ‘may be at a lower level than earlier expected’ and that when that occurs ‘it will be important that the forecast strengthening in some other components of demand starts to occur’.
Outlook
The RBA also concedes that ‘the labour market has generally softened somewhat in recent months’ and again notes that ‘the exchange rate has remained higher than might have been expected, given the observed decline in export prices and the weaker global outlook’.
The RBA also appears to be less confident in the China growth story, now observing that ‘uncertainty about near-term growth prospects is greater than it was some months ago’.
The Bank also commented on their new concerns surrounding the price of our exports, conceding that ‘the terms of trade have declined by over 10% since the peak last year and will probably decline further’. That said, the extent to which the RBA believes the terms of trade will fall remains unclear. And given that lower commodity prices were unarguably lower over Q3, they could merely be stating the obvious.
Finally, it is also worth noting that the decision to cut rates in October (ahead of the CPI data, which will be released later in Oct) marks a break in the way that the RBA has conducted policy over the last year. During that time, the RBA initially conceded that lower rates were warranted in one month (ie October 2011 and April 2012) but waited for the inflation data before adjusting policy the following month (in November 2011 and May 2012).
But while conceding those points, the RBA still seems to adopt a glass ‘half-full’ view of the domestic economy. This was perhaps best exemplified in the final paragraph where the RBA blames ‘international developments’ for triggering a downgrade to domestic growth prospects in 2013 and hence the need for ‘a little more accommodative’ monetary policy. But while Christine Lagarde (IMF) recently stated that there would be downward revisions to their global growth forecasts, they are likely to be modest - as has been the case in the past.
Indices:
The All Ordinaries Index has moved down decreasing -5 points (or -0.1%) since closing last Friday to 10:30 am today.
The rest of the world as measured by the MSCI index increased +9 points (or +1.0%) in A$ from closing last Friday to end of trade Thursday.
The Reserve Bank of Australia (RBA) cut interest rates by 25bps to 3.25% at its October Board meeting.
Impact
The RBA cut its policy interest rate by 25bps at the October Board meeting. Just as important as the interest rate decision itself, however, was the language explaining the decision. And while the RBA obviously has to concede that the economy is not fantastic given that it has just cut rates, the concessions about growth that the RBA did make were modest.
Importantly, the RBA now acknowledges that the peak in resource investment ‘may be at a lower level than earlier expected’ and that when that occurs ‘it will be important that the forecast strengthening in some other components of demand starts to occur’.
Outlook
The RBA also concedes that ‘the labour market has generally softened somewhat in recent months’ and again notes that ‘the exchange rate has remained higher than might have been expected, given the observed decline in export prices and the weaker global outlook’.
The RBA also appears to be less confident in the China growth story, now observing that ‘uncertainty about near-term growth prospects is greater than it was some months ago’.
The Bank also commented on their new concerns surrounding the price of our exports, conceding that ‘the terms of trade have declined by over 10% since the peak last year and will probably decline further’. That said, the extent to which the RBA believes the terms of trade will fall remains unclear. And given that lower commodity prices were unarguably lower over Q3, they could merely be stating the obvious.
Finally, it is also worth noting that the decision to cut rates in October (ahead of the CPI data, which will be released later in Oct) marks a break in the way that the RBA has conducted policy over the last year. During that time, the RBA initially conceded that lower rates were warranted in one month (ie October 2011 and April 2012) but waited for the inflation data before adjusting policy the following month (in November 2011 and May 2012).
But while conceding those points, the RBA still seems to adopt a glass ‘half-full’ view of the domestic economy. This was perhaps best exemplified in the final paragraph where the RBA blames ‘international developments’ for triggering a downgrade to domestic growth prospects in 2013 and hence the need for ‘a little more accommodative’ monetary policy. But while Christine Lagarde (IMF) recently stated that there would be downward revisions to their global growth forecasts, they are likely to be modest - as has been the case in the past.
Indices:
The All Ordinaries Index has moved down decreasing -5 points (or -0.1%) since closing last Friday to 10:30 am today.
The rest of the world as measured by the MSCI index increased +9 points (or +1.0%) in A$ from closing last Friday to end of trade Thursday.
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