The Reserve Bank of Australia (RBA) has jumped on the easing bandwagon, cutting rates on Tuesday for the first time since August 2013, as the central bank moved to prop up an economy hit by falling commodity prices.
The RBA slashed rates by 25 basis points to a new record low of 2.25 percent. The rate decision was a close call with debt markets implying a 60 percent chance of a quarter-point cut, while a poll of economists by Reuters indicated a no move majority.
The news sent the Australian dollar skidding to a six-year low of $0.7650 and plunging more than two percent against the Japanese currency at 89.72 yen. The benchmark S&P ASX 200 index, meanwhile, soared to 7-year highs, adding 1.2 percent to an intra-day peak of 5,692.7 points.
The central bank said in an accompanying statement that economic growth remained at a "below trend pace" with domestic demand growth staying weak. It also said output growth will remain sluggish and sees jobless rate peaking "a little higher than earlier expected."
"What sticks out in this statement is the large change in tune from the RBA. As recently as mid-December, the governor was giving out a different story. They seem much more nervous now about the demand in the Australian economy which is interesting," said Paul Bloxham, chief economist for Australia and New Zealand at HSBC. "The RBA will also give out their statement on Friday, so maybe more clarity there then."
The RBA move echos similar steps taken in recent weeks by several central banks around the world, including Switzerland, Denmark, Canada, India and Singapore, to loosen monetary policy amid deflationary pressures as oil prices collapsed.