RBA cuts rates, All Ords cracks 4,500
The Reserve Bank of Australia (RBA) lowered its target cash rate by 0.5% to 3.75% today, which represented its first reduction in four meetings and the third reduction in its current easing cycle (which began in November 2011). The reduction was larger than expected and sparked a very positive reaction, with the Australian sharemarket rallying and the Australian dollar and bond yields declining on the news. In its accompanying statement, the RBA highlighted that inflation is expected to be lower in the next few years and that with Australia’s terms of trade coming off its peak six months ago, credit growth being subdued and the Australian dollar remaining persistently high, the economy needed additional support. This takes the cash rate down to its lowest level since the end of 2009 and the key issue now is how much is passed onto household and business interest rates. Market analysts have indicated that they expect the banks to keep around 0.1% of the reduction to cover rising funding costs.
The easing was announced after data confirmed a further strengthening of China’s industrial sector in April, which suggests that China’s economy is on track for a soft landing. China’s official manufacturing Purchasing Managers’ Index rose to 53.3, which was its fifth consecutive reading above 50 (which signals expansion) and its highest level in more than a year. Export orders also edged up, indicating that global demand was still holding up relatively well despite Europe’s on-going troubles. In Australia, cyclical stocks rallied on the interest rate news with rate-sensitive sectors such as banks, retail and stocks exposed to the US Dollar leading the way, which led the All Ordinaries Index to rise above 4,500 for the first time in nine months. Similarly the 10-year Australian government bond yield declined 14 basis points to 3.56%, which represents a 60-year low and a level not too far away from its all-time low of 2.99% in December 1941, just after the bombing of Pearl Harbour.
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