Australia Joins The Club and Cuts Rates
Good morning. Whilst the European markets are still talking about Greece and whether their debt will be restructured, we have seen another Central Bank cut interest rates in order to give their economy a helping hand.
In a move that has been mooted but some are still claiming as a surprise, the Reserve Bank of Australia cut interest rates by 25bp to 2.25%. This was the first time it had acted in 18 months. What was the reason behind this? The Australian Economy has started stuttering and the RBA has lowered its inflation expectations to reflect changes in commodity prices. Australia has been hit hard by a fall in commodity prices, GDP is expanding at a much slower rate than expected and Australia is now in a technical income recession.
The feeling is that the Australian Dollar is overvalued and should be brought into line with falling commodity prices. The RBA is using interest rates to push this move and we have seen the Australian Dollar fall to 5 ½ yr lows against the US Dollar. This rate cut, however, should not be seen as being a one-off. We are expecting further cuts in the months to come.
According to yesterday’s UK PMI results, the UK economy is starting 2015 quite nicely as falling oil prices, lower input costs, rising employment and domestic demand are all contributing to a rather positive economic landscape. We do, of course, still have the Eurozone issues to deal with as George Osborne highlighted yesterday that Eurozone events are a specific danger for the UK economy and “we have got to make sure that in Europe, as in Britain, we choose competence over chaos”.
Its actually a relatively quiet day for data today but expect more reaction from talks between Greece and the Eurozone.