Strong start warranted after RBA cuts interest rates

15.11 AEST, Tuesday 2 October 2012

Strong start warranted after RBA cuts interest rates

By Ben Taylor (Sales Trader, CMC Markets)

The market’s early strength was warranted as the Reserve Bank cut interest rates by 25bp to 3.25%. The cut was not expected by the majority of economists who were calling for a Melbourne Cup cut however the interbank futures market provided the best indicator for the market to follow.

The equity market traded higher before the rate cut announcement and were pushed along with positive momentum from the US and European equity markets overnight. The Aussie dollar however did not trade with a cut in mind and fell over half a cent following the announcement as investors scrambled to reduce their long Aussie dollar positions.

The cut will be a welcome relief for our domestic economy that has been struggling with a stubbornly high Aussie dollar, falling commodity prices and cuts to mining investment plans. The RBA is hoping that a reduced rate will shield us from a slowing China and the European debt crisis whilst keeping our domestic growth robust.

Yesterday’s inflation gauge and manufacturing PMI provided the RBA with room to move and also signalled to the market that a cut was a decent chance today.
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