The RBA cut the cash rate for the first time since September 2013, by -25 bps, to a new record low of 2.25% in February. Aussie slumped to a new 2009-low of .7651 following the announcement as the central bank appeared more dovish than anticipated. Following RBNZ's comments that the next rate direction could be up or down, and BOC's surprisingly rate cut last month, the market had priced in a higher chance (two in three) for an RBA rate cut. Disappointing economic data, including a subdued inflation report, weak 3Q14 national accounts, further decline in Australia's commodity prices and falling confidence a sharp drop in confidence suggested further easing is needed for stimulate the economy.
As mentioned in the accompanying statement, growth in Australia continued at 'a below-trend pace, with domestic demand growth overall quite weak'. While the sharp decline in oil prices over the past months would support consumer spending, it would result income growth by lowering the terms of trade. The RBA also noted the increase in unemployment rate over the past year. Overall, the central bank expected growth to 'remain a little below trend for somewhat longer, and the rate of unemployment peak a little higher, than earlier expected'.
On inflation, the RBA acknowledged that CPI growth was the lowest for several years in 2014, as a result of 'sharp decline in oil prices at the end of the year and the removal of the price on carbon'. It also noted that underlying inflation slipped to around 2.25% over the year. Policymakers continued to expect inflation to remain 'consistent with the target over the next one to two years', despite further depreciation in Aussie. They appeared less concerned with the strength in Aussie, suggesting that the 'Australian dollar has declined noticeably against a rising US dollar over recent months, though less so against a basket of currencies'. Yet, they warned that it remained 'above most estimates of its fundamental value, particularly given the significant declines in key commodity prices' and 'a lower exchange rate is likely to be needed to achieve balanced growth in the economy'.
The rate cut this month was adopted in spite of rising property prices. Data from CoreLogic RP suggested that housing prices soared in January with prices in Sydney and Melbourne jumping +1.4% and +2.7% respectively. The RBA noted in the statement that dwelling prices rose 'strongly' in Sydney. Yet the 'trends have been more varied in a number of other cities over recent months'. However, policymakers believed that a rate cut is appropriate in this meeting in order to 'add some further support to demand' and to 'foster sustainable growth and inflation outcomes consistent with the target'. Australia's domestic economic developments and global central banks' actions should determine the likelihood of a further cut in March.
