Yesterday the Reserve Bank of Australia cuts its official cash rate to a record low of 2.25%. This move was anticipated by a number of economists, however the consensus was for a move later in the year so the move came as a surprise to some. The board said that "on balance, a further reduction in the cash rate was appropriate. This action is expected to add some support to demand, so as to foster sustainable growth and inflation outcomes consistent with the target." There is concern that economic growth will remain below trend, unemployment will peak higher than expected and terms of trade are reducing due to lower commodity prices. Historically, the RBA has made a series of cuts over a short period so there is now realistic scope for further cuts in 2015.
In response to the announcement the Australian Dollar dropped suddenly but at the time of writing it had regained most of the losses in overnight trading to remain slightly down (~0.4%) since the announcement. The interest rate swaps curve was also only slightly impacted with the 90-Day and 180-Day bank bill swap rates dropping to 2.38% (from 2.47%) and 2.39% (from 2.51%) respectively. Broadly speaking the the interest rates market seem pleased with the RBA action and the curve remains very flat to slightly inverted out to 5 years.
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