RBA: Rate cut by 25 basis points

It was not surprising that the Reserve Bank of Austalia (RBA) cut bank rates by 25 basis points in its monetary policy statement today. On Friday, RBA governor Glenn Stevens touched about the effects of a rate cut. Why would he mention about it in his speech if a rate cut was about to take place?

In terms of financial markets, while the ECB`s monthly purchases are less than the Federal Reserve`s (FED) cap of $ 85 billion, on an annualized basis the ECB`s purchase would be equivalent to around 7.5% of the euro area`s annual GPD. In comparison, the purchase relative to GDP by the FED is only 6% of the US GDP while the Bank of Japan has a rather high 16% of the Japanese GDP. The Australian dollar has depreciated around 9% against the US dollar since the December meeting and was around 4% below its early 2014 levels.

Back to the rate cut, the board decided to lower the cash rate by 25 basis points to 2.25%. The concept of interest rate parity would dictate that the Australian dollar would set to drop further against the US dollar, however this was not the case yesterday.

The whole monetary policy statement has to be read and thoroughly analyzed to predict which direction a currency would go. This time around, the RBA implied that a rate cut would help improve the GDP.

The full text can be found here.