More than a year after the first rate cuts by the European Central Bank (ECB) and the US Fed since the pandemic, Australia has finally joined the global rate cycle by trimming borrowing costs in the country by a quarter point in late February.
The Pacific country is one of the last developed economies in the world to pivot on its interest rate stance. The lone exception remains Japan, which is, in fact, raising capital costs after decades of negative rates and inflation.
The quarter-point cut will bring Australia’s cash rate target to 4.10% and the interest rate paid on exchange settlement balances to 4%, a tab lower than the Fed’s current 4.25% rate.
In her policy decision statement, Reserve Bank of Australia (RBA) governor Michele Bullock attributed the cuts to subsiding inflation, which has hit 3.2% in the latest report. She also mentioned continued “subdued growth in private demand,” as another key driver of the rate cut.
The latest quarter-on-quarter GDP report for the country came in at 0.3%, well below general expectations of a 0.5% increase. Year-on-year economic growth figures also disappointed, showing a 0.8% increase against a 1.1% expectation.
Despite the milestone move by the RBA, the market interpreted the news as a “hawkish” cut, as Bullock was quick to dampen expectations for deeper rate cuts in the next few meetings.
“The market is expecting quite a few more interest rate cuts in the middle of next year, about three more on top of this,” said Bullock in the news conference that followed the RBA statement. “Whether or not that eventuates is going to depend very much on the data. Our feeling at the moment is that that is far too confident.”
As a consequence, the market adapted its expectations for rate cuts in the country, pushing the Australian dollar upward against the US dollar, an unusual follow-up to a rate cut. “Interest rate swaps markets now price in fewer than two further rate cuts from the RBA this year, with the second of the cycle not fully priced until August,” explained David Scutt, an analyst at Forex.com.
