Australia’s Central Bank Stuns Global Markets

The Reserve Bank of Australia’s (RBA) decision to leave interest rates on hold this week stunned financial markets, not just in Australia but elsewhere in the world. Moreover, the decision has broader implications for global markets, according to Matt Robinson, senior economist, Moody’s Analytics.

In keeping the benchmark interest rate at 3.75% at its first meeting in 2010, the RBA cited persistent uncertainty regarding the global outlook. The consensus had unanimously expected the RBA to increase the cash rate by 25 basis points to 4%. Following the shock, the Australian currency dropped sharply and equities rallied as traders pared expectations regarding future rate hikes. The dovish statement accompanying the decision suggested the RBA is not entertaining a March interest rate increase either, with diminished prospects for tightening later in the first half of the year. This prompted a wholesale readjustment of expectations regarding the speed and extent of future interest rate adjustments in the country.

Without overstating the relevance of Australia’s central bank in the global scheme of things, the decision has broader implications than merely the outlook for Australia. Late last year, when the RBA became the first G20 central bank to commence lifting interest rates from their emergency levels, financial markets across the world took notice. A forward-looking central bank had clearly assessed that the worst of the global downturn had passed, and the focus was shifting towards withdrawing monetary stimulus measures to prevent excess liquidity and easy credit from stoking inflationary pressures.

In a similar vein, but perhaps in an opposite respect, this decision also influenced markets beyond Australia’s shores. A seemingly optimistic central bank that had been tightening settings ahead of the curve has now paused earlier than expected – well short of a neutral rate that neither stimulates nor constrains economic activity – due to persistent uncertainty regarding the global outlook. Traders not only pared expectations regarding anticipated RBA rate hikes in the months ahead but also trimmed expectations for adjustments by other central banks this year. Equity markets across the world were buoyed by the signal that accommodative monetary settings would likely be retained for an extended period. Rather than being a bellwether for global monetary tightening, the RBA has seemingly become a harbinger of caution and pragmatism – indicating that the inevitable monetary tightening across the world in coming months will be gradual given lingering global uncertainty.


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