In a move that will likely come as a surprise to many the Reserve Bank of Australia has elected to cut the official cash interest rate following yesterday's board meeting.
The decision to reduce the cash rate by 0.25% to 1.75% is the first movement the central bank has made in a year, with the last change happening at the May 2015 board meeting.
Prior to the meeting sentiment was leaning to the RBA remaining still, with many economists and financial commentators predicting the bank would at least wait until the fallout clears from tonight’s Federal Budget announcement before making any changes.
“Any move by RBA to move rates with the budget around the corner which will outline the Government's Fiscal Policy going forward will reflect a lack of prudence,” Bank of Sydney deputy chief executive officer Steven Pambris said before the meeting.
While he predicted that the RBA would keep their powder dry today, James Boyle, chief operating officer at non-major lender Liberty, said economic pressures had been mounting recently that the RBA had to take notice of.
“The biggest concern for the RBA could be the rising dollar – currently around 77 cents against the US – which could have an effect on the adjustment already underway in the economy,” Boyle said
“Additionally, with a forced election taking place earlier than expected in Australia, and the US election really ramping up – this could also see both economies slow a little as market players hold off making big decisions until they know the outcome,” he said.
While the strength of the Australian dollar against the green back may have played a role in the decision, those who predicted a cut believe recent inflation figures were likely the deciding factor.
“The low inflation result opens the door for the Reserve Bank to cut rates if they deem it is necessary. When it comes to inflation central banks across that globe are facing the same concerns,” Commonwealth Bank equities economist Savanth Sebastian, said.
The bottom line is that underlying inflation is undershooting the 2-3 per cent target band and that suggests little risk in cutting rates a little further,” Sebastian said.