Australia's central bank on Tuesday cut its key interest rate 25 basis points to 7.0 percent, the first easing in seven years, as it attempts to combat tighter financial conditions amid the global credit crunch. In a brief statement after its monthly policy meeting the Reserve Bank of Australia (RBA) said it looked more likely the economy would slow enough to subdue inflation over time.
"Weighing up the available domestic and international information, the Board judged that there was now scope for monetary policy to become less restrictive," Governor Glenn Stevens said after the widely anticipated cut. Still, Stevens also made it clear that any future cuts would depend on how the economy developed month to month, disappointing some investors who had hoped for a green light on more easing.
"The statement is quite a balanced one and has nothing in it to suggest that they will move on rates aggressively," said Su-lin Ong, a senior economist at RBC Capital Markets. "Markets are a tad disappointed, but we still expect the RBA to move another 25 basis points sooner rather than later."
The Australian dollar initially rose following the central bank statement, which was not dovish as many had expected, but later fell to a one-year low of $0.8448 as the US dollar rallied across the board. Australia follows neighbour New Zealand in cutting rates, and analysts think Canada and Britain could cut soon. But inflation fears led the euro zone to raise rates in July and many emerging economies are under pressure to tighten as well.
Investors here are still pricing in at least one more RBA cut by Christmas. A Reuters poll of 15 analysts found a 55 percent probability of a cut as soon as October, with a target 6.25 percent in 12 months time.
Tuesday's move had been well priced in after the central bank recently signalled there was scope to unwind some of its past hikes given domestic demand was slowing sharply and financial conditions had been tightened by the global credit squeeze. Prime Minister Kevin Rudd welcomed the move saying it would put nearly A$600 a year back into family budgets, while being the first easing 740,000 first-time homebuyers had seen.
The central bank had raised rates as recently as March, lifting them to a 12-year high as it battled a pick-up in inflation. Indeed, core inflation was still running at 17-year highs of 4.4 percent and the central bank forecasts it will remain above its 2 to 3 percent target band right out to 2010.