After nearly 18 months of sitting on the sidelines, the RBA has acted by cutting the overnight rate 25bps, to 2.25%.

Our economist, Stephen Roberts, predicted the move and was one of only 6 out of the 26 economists surveyed by Bloomberg to get the call right. The bond market had priced in a greater than 50% chance of a cut and is now pricing a 45% chance of a follow-up cut next month and fully pricing it by June.

In its accompanying statement, the RBA has hinted at further cuts to come with obvious concern for domestic growth. The sharpest part of the decline in mining investment is setting-in, and Australia needs unusually strong household and non-mining business spending to generate even, long-term trend, economic growth. The RBA tends to implement monetary policy in a series of moves, so an additional cut next month is a definite possibility.

The RBA still has concerns around a prospective housing bubble and has noted that “the bank is working with other regulators to assess and contain economic risks that may arise from the housing market.” The currency market reacted strongly to the cut with the AUD falling from 0.7820 to 0.7660, while short-end interest rate markets continued their march lower in yield.