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Does 'Stunning' Rate Cut by RBA Point to Worsening Economy?

Tuesday, 1 May 2012 | 2:53 AM ET

The Reserve Bank of Australia's surprise move of cutting interest rates on Tuesday by 50 basis points — its biggest cut since the last financial crisis — has market analysts wondering if there's more bad news ahead for the Australian economy.

AP

"To make a move like this, they [RBA] must be seeing a much weaker demand story then we've seen in the past," Michael McCarthy, Chief Market Strategist at investment firm CMC Markets said on CNBC Asia's "Capital Connection."

"The fact that they've taken to it indicates that they're seeing things a lot worse than they were a month ago."

Matthew Circosta, Economist at Moody's Analytics adds that the 50 basis point cut, which was double the markets’ consensus of a quarter-point cut, suggests the central bank thinks the economy is taking a turn for the worse.

"We haven't seen a rate cut this large since the global financial crisis, we're certainly not in that predicament right now, but are we headed there?" Circosta said. "Are we worried that things are going to get worse?"

The Australian dollar fell sharply Tuesday on the news, skidding to a session low of $1.0318. Interest rates are now at the lowest since 2009, when the RBA slashed rates by 100 basis points at the height of the financial crisis, bringing rates down to 3.25 percent.

Tuesday’s move comes after data earlier in the day showed house prices in major Australian cities falling for a fifth straight quarter, highlighting weakness in the housing market.

With domestic consumer sectors like retail and manufacturing also showing waning demand, Circosta says the RBA wanted to make a statement that would force commercial banks to lower their interest rates.

"At the end of the day, the RBA cash rate really influences the household lending rates and the business lending rates in the economy," Circosta said. "So that's what they want to influence, they've had to ease aggressively in order to work to get them lower."

Circosta’s view was echoed by Barclays Research, which released a note saying a 50 basis point move seems to be the RBA’s plan to push for a bigger mortgage rate reduction by local banks.

However, Barclays also noted that a 0.5 percent cut could also be viewed as the RBA having made a mistake by not easing monetary policy so far this year.