The Reserve Bank of Australia announced on Tuesday a cut of its official cash rate to 2%, a record low. However, contrary to expectations, the Aussie dollar bounced.
The quarter-point reduction in interest rates was widely predicted by the market and economists. The RBA surprised markets in April by keeping the cash rate on hold after a similar reduction in March.
With Tuesday’s announcement, though, RBA governor Glenn Stevens said the cut comes despite of stronger growth in employment and “improved trends in household demand”
The on-going property boom in Sydney has also been weighing heavily on the RBA’s decisions this year.
The governor’s comments appeared to subdue the currency market’s usual reaction to such a cut, even sending the Australian dollar in the opposite direction to what would normally be expected.
Immediately upon the announcement, the Australian dollar fell by around USD 0.003. However, it quickly recovered to just under USD 0.79 in late afternoon trading in Australia.
Against the pound, the Aussie dollar rallied. According to currency trading website, Ozforex.com.au, prior to the RBA’s announcement it was trading at around GBP 0.5197. Following the announcement it peaked at GBP 0.5232 before easing back a little in late trading.
Stevens cautioned on business and public spending, though.
“Looking ahead, the key drag on private demand is likely to be weakness in business capital expenditure in both the mining and non-mining sectors over the coming year,” he said.
“Public spending is also scheduled to be subdued. The economy is therefore likely to be operating with a degree of spare capacity for some time yet.”
IMAGE: (Greg Wood/AFP/Getty Images)