Central Banks

Australia cuts rates to new record low of 2.25%

After rate cut, Australia's housing at risk: HSBC

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.

Dan Himbrechts | Bloomberg | Getty Images

Falling commodity markets have hurt both company profits and mining investment in Australia, which is already suffering from a protracted slowdown in demand from China, its biggest export market.

Government data earlier in the day showed Australia's trade account in the red for a ninth-straight month in December as falling commodity prices continued to hurt export earnings.

The country posted a deficit of A$436 million ($340 million) in December, bringing the shortfall for the second half of last year to A$6.5 billion.

"A few things have happened over the last few months that has changed the outlook a lot. The global headwinds facing the Australian economy intensified via lower commodity prices and patchy non-U.S. growth so the global outlook isn't as good," said Scott Haslem, chief economist at UBS.

Many analysts are now penciling in further cuts to come.

"The RBA offered no forward guidance on monetary policy today. However, if history is any guide, RBA rate cuts never come alone and so a further 25 basis points move to 2.0 percent could be expected incoming months," analysts at Commonwealth Bank said in a note.

And in a tongue-in-cheek tweet sent out by AMP Capital Chief Economist Shane Oliver after the decision, he said, "Rate moves are like cockroaches - there's usually more than one. So expect another rate cut to 2 percent around April."

HSBC's Bloxham does warn of the tough juggle by RBA between lowering rates and managing the booming housing market.

"[The housing sector] is a risk and it's a big challenge for the RBA at this point in time. But the housing sector has already been booming, house prices are up year-on year," he said "Has the RBA delivered low enough rates to deliver the housing sector into bubble territory?"

— Reuters contributed to this story