Australia Cuts Rate Other Data Limit the Reaction

12-03-2008 06:00

Reserve Bank of Australia cut the cash rate by 100 basis points to 4.25 percent. While the reduction was more than analysts' estimates, earlier reports on the current account and retail sales came better than expected, helped Australian dollar to limit the negative reaction. In three hours before the board meeting, a report from the Australian Bureau of Statistics showed that the current account deficit narrowed in the third quarter when trade balance turned from deficit to surplus at the same period, reflecting the increase in exports of coal and iron ore to countries like China.

Deficit may narrow further as the recent depreciation of Australian dollar decreases domestic demand for foreign products by making them more expensive.

Australian Retail Sales

Another report from the ABS also showed the Retail Sales rose 0.2 percent in October. However the trend is weak and the monthly average gain is still lower than the previous year.

Australian Prime Minister Kevin Rudd has already announced that he is ready to follow a budget deficit to reduce the negative effects of global slowdown on the economy. Financial crisis negatively affected confidence among households and businesses and it is why the RBA expects to see "private demand remain subdued in near term".

Today's rate cut extends the biggest round of reductions since 1991, and policymakers want to see it passed through banking system to lower lending rates. Together with the spending programs they hope to support demand and stimulate growth.

Rate Decision and Aussie's Reaction

The reaction to the rate decision was somewhat limited showing this fact that the market has already priced most of expectations.

It worth noting that the Australian dollar rose in response to the current account data when the market sentiment had been battered by a more than 7 percent fall in major U.S. equity indexes last night.