The RBA Cuts Down To 3.25%

Release Explanation: The interest rate sets the tone for mortgages, commercial loans, and all economic lending criteria. This is the single most important reason why currencies are bought and sold. A strong interest rate and robust business cycle will attract foreign investment. A weak interest rate will normally lead to a weak currency as investors swap the higher yielding currency for a profit.
 
Trade Desk Thoughts: The Reserve Bank of Australia has lowered its interest rate a full 100 basis points to 3.25 percent. Governor Glenn Stevens has lowered the rate to a low not seen during the last two decades. By doing this, Governor Stevens and the RBA aim to restore consumer and business confidence which has been battered by the global financial crisis and hopes that this cut well help spur demand and keep the country from slipping into a period of negative growth.


Forex Technical Reaction: The Australian dollar jumped 60 pips immediately after the release went public. Tonight is the first time the aussie has strengthened, after being sold for three consecutive trading days. Since the high was reached in July 2008, the aussie has lost 35%

Full Detail: At its meeting today, the Board decided to reduce the cash rate by a further 100 basis points, to 3.25 per cent, effective 4 February 2009.

There was a significant deterioration in world economic conditions late in 2008. The effects on household and business confidence of the financial turmoil following Lehman’s collapse, and continuing strains on major financial institutions, saw a significant downturn in demand around the world. As a result, the major advanced economies contracted sharply in the December quarter, as did a number of emerging market economies. The Chinese economy, though still growing, has slowed markedly. Global inflation, having reached high rates during the middle of 2008, is now declining.

Measures to stabilise financial systems have contributed to an improvement in the functioning of credit markets over the past couple of months. This, in conjunction with expansionary macroeconomic policy measures being taken around the world, should assist in promoting global recovery over time. But the near-term outlook for the global economy is the weakest for many years.

Economic conditions in Australia have also been affected, though less than in other advanced economies. Australia’s financial system remains in a strong condition and large interest rate reductions over recent months have been passed through in substantial measure to end borrowers. Nonetheless, the combination of last year’s financial turmoil, a severe global downturn and substantial falls in commodity prices has had a significant dampening effect on confidence, and therefore on prospects for growth in demand. Inflation has begun to moderate and, given recent developments, it is likely to continue to decline.

In these circumstances, the Board judged that a further sizable reduction in the cash rate was appropriate, to give further support to demand. In making its decision, the Board took into account the package of measures announced by the Government earlier today. The combination of expansionary monetary and fiscal policies now in place will help to cushion the Australian economy from the contractionary forces coming from abroad.