It’s a big day of data with the Reserve Bank delivering a much-anticipated cut in its key interest rate, the central bank dropped its cash rate to 2.25 per cent which is a record low. Also today the ABS showed the trade deficit shrunk in December.
Expansionary monetary policy
For a year and a half the RBA’s cash rate was at 2.5 per cent but it was today cut to 2.25 per cent. It was big news but the impact had already been largely felt. The dollar has been dropping in anticipation of lower returns, while high yielding stocks have surged. The likes of Commonwealth Bank and Telstra have hit all time highs.
With the unemployment rate above 6 per cent, inflation at 2.25 per cent and commodity prices crashing, the cut was needed to stimulate growth.
The central banks of Switzerland, Canada and New Zealand have all cut their rates in recent months. The RBA explained their decision saying, “growth is continuing at a below-trend pace, with domestic demand growth overall quite weak.”
For many commentators, today’s cut was no surprise…
While a lower interest rate should help incentivize investment over saving, there is the very real threat that lower rates could push an already overheated property market to the edge; “The Bank is working with other regulators to assess and contain economic risks that may arise from the housing market.” Says the RBA’s press release.
There were some key deflationary factors the board would have been very aware of: the tumbling oil price operates as a tax cut to Australians, and with so much talk of a rate cut the Aussie dollar has already dipped below $US0.78 which makes Aussie exports more internationally competitive.
The Aussie dollar was buying around $US0.77 as this story was published.
The Australian Bureau of Stats has shown the trade deficit moved closed to surplus in December with a decrease of 57 per cent bringing the deficit to $436 million, seasonally adjusted.
Exports grew 1 per cent or $374 million, while imports were down 1 per cent by $206 million.
The falling Aussie dollar is playing its part, it’s now buying less than $US0.78 which makes imports more expensive for Australians and our exports become more competitive in the global market.
Note; today’s rate cut will see the dollar fall even further.
Over 2014 the trade balance improved to a deficit of $9.9 billion. In 2013 it was $10.3 billion.
Now we wait until March 3 to see how the trade figures fit into the Balance of Payments for the December quarter of 2014, stay tuned.