Flash Notes:Australia,RBA Joins Easing Bandwagon, Rates At Record Low

In the first major central bank policy decision of February, the Reserve Bank of Australia joined many of its peers around the world to cut its benchmark policy Cash Target rate by 25bps to 2.25%, the first cut since holding the rate at 2.5% since September 2013, and the lowest on record.

    The RBA said that recent data justified the policy shift. Domestic demand growth overall was quite weak and looks likely to continue below trend growth pace while inflation is seen to stay with target over the next 1-2 years, unemployment seemed to be peaking a little higher than previously projected. Externally, RBA noted that growth in Europe and Japan was weaker than expected while lower energy prices will lower inflation temporarily. RBA noted that the AUD remains overvalued, “above most estimates of fundamental value” and that a lower AUD is likely needed for balanced growth.

    The Australian stock markets received the latest RBA action very well as the ASX 200 extended gains by 1.2% to 5694.40, the highest since May 2008 while the Aussie dollar weakened by more than 1% to US$0.7662 (from 0.7791 prior to the RBA decision) and looks on course to head towards RBA Governor Glenn Stevens’ 75-cent target. The kiwi also weakened in tandem with the AUD fall and RBA cut, declining by more than 1.4% to US$0.72 (from 0.73 pre-RBA). The next immediate economic data that we will be watching will be the RBA’s release of its Statement on Monetary Policy on Friday (6 Feb).

    Central banks are definitely in the spotlight these days. As we recall in January 2015 alone, of the 11 central banks that made interest rate changes, ten lowered their benchmark interest rates