The Reserve Bank of Australia decided to cut the overnight cash rate with 25 basis points to 1 per cent as a precautionary measure against adverse short-term economic trends, and also to meet the increased international uncertainties.
The RBA observed a trend of 'subdued inflation' in most advanced economies, that has been attributed to the heightened global trade uncertainties, which are hurting investment. In regards to interior economic conditions, the Board of Directors of the RBA had this to say:
“Over the year to the March quarter, the Australian economy grew at a below-trend 1.8 per cent. […] Employment growth has continued to be strong […] Taken together, labour market outcomes suggest that the Australian economy can sustain lower rates of unemployment and underemployment. Inflation pressures remain subdued across much of the economy. Inflation is still, however, anticipated to pick up, and will be boosted in the June quarter by increases in petrol prices.” [source]
Overall, the rate cut was highly anticipated by investors who weigh in on the expected improvement of investment conditions resulting from the more accommodative monetary policy of the RBA. With the lower rate, the total investment is expected to spike up, which in turn should support a stronger inflation performance and boost the aggregate economic growth for the next quarter. Thus, the business confidence index in the country had increased markedly before the interest rate decision.
Image source: TradingEconomics.com
Despite the overall positive outlook, however, it should be noted that the recent dip of the oil prices following the OPEC conference could have a somewhat hampering effect on Australian inflation, which could remain subdued as a result of that.
Image source: TradingEconomics.com
In case that inflation does not pick up as expected, the RBA might be compelled to consider even further reductions in the OCR at a future date, despite the strong performance of the labour market.
Because the broader market expected the decision and there were no significant surprises to follow from the release of the statement of the Board of Directors, the market did not react very definitely to the news of the rate cut. The AUDUSD pair appreciated with a 0.43% during yesterday's trading session and broke above the significant resistance level at 0.69800.
The price had done the same following the implementation of the last RBA interest rate decision in June; however, it retraced back below the resistance level in the next following days.
Image source: Trendsharks ©, created with TradingView.com
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