Reserve Bank lowers cash rate by 0.5%

The Reserve Bank of Australia (RBA) has just lowered the cash rate by 50 basis points, or in English half a percent. Immediate response in the markets was for the Aussie dollar to drop approx. 1cent against the US$ and for Gold to spike by AUD$12/oz.

chart from xe.com

Chart from goldprice.org

From Sydney Morning Herald

Original source

The Reserve Bank has slashed interest rates by the most since the global financial crisis in a bid to reignite growth in the sagging economy. The dollar dived on the decision.

The central bank today cut its official cash rate by 50 basis points - twice the amount expected by economists - to 3.75 per cent.

Today’s surprise reduction, the first by the RBA this year, is the biggest since February 2009 and reflects the bank’s concern that the economy needs an extra shot in the arm.
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Attention will now shift to the commercial banks as borrowers - and depositors - wait to see how much the lenders cut interest rates, and how soon. ANZ customers, though, will probably have to wait until Friday before they learn of the change.

The RBA indicated that the size of today's cut is needed in part because the central bank anticipates commercial lenders won't pass along the full reduction.

"A reduction of 50 basis points in the cash rate was, in this instance,...judged to be necessary in order to deliver the appropriate level of borrowing rates," RBA governor Glenn Stevens said in the statement accompanying today's move.

The dollar immediately shed half a US cent to drop to about $US1.035 on the decision as the lower Australian interest rates cut its lure for investors. It fell even further in recent trading, to sink towards the $US1.03 mark.

"Our view is that they will deliver a rate cut in August," said Commonwealth Bank Chief Currency Strategist Richard Grace. He tips the Australian dollar will slip below parity with the US dollar over the next few weeks.

Bank of America Merrill Lynch Australia chief economist Saul Eslake said the RBA noted the damaging impact of the strong dollar on the local economy and the need for lower official rates to make room for lower commercial lending rates.

‘‘In making the decision, the RBA has explicity acknowledged the dampening impact on growth by the strong dollar,’’ said Mr Eslake.

The RBA governor Glenn Stevens said in accompanying statement said: ‘‘Output growth was affected in part by temporary factors, but also by the persistently high exchange rate.’’

Today’s cut leaves the RBA’s cash rate at its lowest since December 2009 when the economy was recovering from the initial impact of the GFC. The RBA raised rates seven times from October 2009 before changing course last November with the first of two cuts to round out 2011.

Read more: http://www.smh.com.au/business/rba-slashes-interest-rates-20120501-1xwgg.html#ixzz1tb4Fuww4