Australia slash rates by 100bps
07 October 2008
The Reserve Bank of Australia cut rates by 100 basis points last night taking rates down to 6.0%. The market had been anticipating a 50bps cut however the Central Bank deemed more drastic action necessary given the current economic climate. RBA Governor Glenn Stevens said the unusually large move was justified by a severe deterioration in the outlook for global growth combined with a sharp rise in funding costs for banks.
Understandably, Australian equities rallied 1.7% on the news following a fall to a 3 year low on Monday. However, the surprise was the Australian Dollar which rallied to $0.7355 against its US namesake and to 2.3833 against Sterling. Typically, you would expect a currency to loose ground when a central bank unexpectedly cuts rates however that is clearly not the case here. Instead, the market seems prepared to reward a currency where the Central Bank is prepared to be proactive in maintaining stability in the local economy.
Attention now turns to the Bank of England interest rate decision on Thursday where a rate cut is also anticipated. The only question is whether the committee look to cut by 25 or 50 basis points.