Australia s central bank continues to ease

Reserve Bank of Australia (RBA) governor Glen Stevens is being called “Santa Stevens” today after cutting rates by 25 basis points to 3% – a level not seen since the midst of the global financial crisis that hit markets mid 2009. The decision to cut in December is slightly earlier than our prior February preference (which wasn’t a certainty anyways), but it seems like the central bank “desires” to get on the front foot and stimulate demand before the year is out. While a December cut doesn’t feed into household budgets in time for Christmas spending, it does provide confidence and the hope is that will flow through to the New Year.

Since the RBA is on holiday in January, the timing of the move suggests that February is perhaps not as likely as previously thought and with that in mind the Australia dollar has held ground very firmly, last trading at US104.45 cents. It shot up by around 40 pips on the announcement being released to the market. A strong currency helps contain inflation for the RBA, a major headwind which has still not gone away.

Bottom line: As we round out 2012 we leave with a RBA that played catch up for most of the second part of the year, after failing to see the challenges early on. It seems like the central bank is lagging again going into 2013 – equity markets have improved, base metals prices are firm, Chinese data is positive and the US continues on a steady recovery path that could ramp up very quickly once the fiscal situation is sorted out. The RBA is perhaps near the bottom of its rate cutting cycle – a fact that will be influenced by global factors. If this is the case, 2013 will see a shift in RBA policy and that will have a profound impact on the A$. Things can change in a very short period of time, something to contemplate over the holiday break.