RBA cuts rate, assessing future bias

Reserve Bank of Australia (RBA), decided to cut policy rate by 25 basis points at today’s meeting against expectations of no change in policy. Aussie is naturally weak, trading at 0.756, down -1.27% so far today.

Let’s look at the details of policy announcement to assess the bias of RBA.

Key highlights 

• RBA notes that global economy is growing but now at much slower pace than earlier noted. Growth has been forecasted down recently. Acknowledged improvement in advanced economies and deteriorating conditions weakness in emerging market economies. RBA considered China to be growing moderately. Chinese recent fiscal actions supporting growth in near term.(Neutral bias)
• RBA acknowledged recent rise in commodities prices but notes that it is much lower compared to years back, so terms of trade is weaker for Australia. (Mild dovish)
• Financial market volatility have improved, however uncertainty remains and monetary policy globally remains very accommodative. (Neutral)
• Despite weakness in mining investment, economy picked up along labour market in 2015 and improvement continues. Labour market recently giving mixed signals. (Neutral)
• Inflation low and likely to remain so, labour cost subdued. Lower inflation outlook than previously forecast. (Dovish).
• RBA seems to be less worried over the risks from rising house prices and considered supervisory measures effective. Risk to this sector from lower rates, less compared to year back. (Dovish)
• RBA expressed worries over recent strength of Australian Dollar as it could derail rebalancing, which has been helped so far by low interest rate, credit to business sector and lower exchange rate aiding trade sector. (Mild dovish)
• RBA considers with today’s easing, growth and inflation outlook will be helped.

Compared to previous policy statement, this is sharp turn on the dovish side along with a rate cut. RBA dropped language that inflation is close to target, suggesting there are rooms for further rate cuts if necessary.