RBA sees the light and goes 50

 

Low inflation, sub-trend economic growth, global funk and financial market intransigence have seen the RBA cut rates by 50 basis points to 3.75%.

The mis-steps of recent months from the RBA have been completely addressed by the move today and allowing for 40 basis points or so to flow through to mortgage and small business borrowers, there should be some lift in confidence, cash flow and with those, economic activity in the medium term.

The RBA has shown its usual pragmatism, moving to catch up with events and news, acting without fear or favour when it comes to managing inflation pressures in the economy.   Nine point five out of ten for the RBA for not being constrained by the perception that a move of more than 25 would “spook the market” or “set the horses running”.  Well, stocks rose 0.8% today, 10 year government bond yields hit an all time low and the AUD, while it dropped 1 cent, is trading at the same level it was on Friday.  The RBA action was as spooky as Casper the friendly ghost.

The RBA Statement does nothing to cause alarm over the state of the economy.  It was simply a matter where policy needed to move to a more accommodative stance because:

• “economic conditions have been somewhat weaker than expected, while inflation has moderated.”

The RBA is now likely to be refreshing its forecasts.  It wants to have an outlook that would have a pick up in GDP to 3%+ by the end of 2013 and for inflation to reach something around 2.5% at that time.  Whether it reckons a 3.75% cash rate will get it there remains to be seen, but today’s rate action makes it more likely.

By going 50 basis points now, the RBA is now likely to hold fire in June, although global economic and market events may change this.  That said, it still seems likely that a further tweak lower in the cash rate will be required sometime after that:  Cash to bottom out at 3.5% sometime in the next few months.