RBA Cuts Rates to 2%

Australia’s central bank cut interest rates for the second time this year on Tuesday, seeking to buttress the economy against sliding mining investment while heading off a harmful increase in the local dollar.  The currency did initially drop after the Reserve Bank of Australia (RBA) trimmed its cash rate a quarter point to a fresh all time trough of 2.0 percent. Yet it soon rallied as investors wondered whether the easing cycle might now be over.

Indeed, the statement announcing the move noted some improvement in the economy while omitting a mention that further action could prove necessary.  “The Board judged that the inflation outlook provided the opportunity for monetary policy to be eased further, so as to reinforce recent encouraging trends in household demand,” said RBA Governor Glenn Stevens.

He also offered a nod to recent better data.  “The available information suggests improved trends in household demand over the past six months and stronger growth in employment.”  As a result, interbank futures dipped from July onward as the market pared back the prospects of rates going under 2 percent. The local dollar first slid half a U.S. cent only to more than reverse the drop to stand at $0.7893.