Reserve Bank of Australia Rate Cuts May Continue

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The Reserve Bank of Australia cut its benchmark interest rate to an all-time low of 2.25% on February 3. The move came as the Australian government sought to rejuvenate an extremely sluggish economy while at the same time keeping downward pressure on the Australian dollar.

Sustainable Growth

The RBA governor Glenn Stevens, in his brief statement, said the bank had concluded that output would remain a little lower than desired, and unemployment rates a little higher. He further stated that the move expected to foster sustainable growth and drive inflation closer to the bank’s target rate. Financial experts estimated that core inflation expects to stay near the bank's target of 2 to 3%, for the most of 2015.

RBA Policy Flexibility

Australian markets are betting on a cut in March, although so far it is speculation by a few economists. Yields on 10-year government bonds that were already trading below market rates further dropped to a record low of 2.36%, and at the same time, Australian stocks spiraled to their highest level since 2008. 

The rate cut was the RBA's first since August 2013 and marked a change of direction from its previous meeting in December where it signaled a period of policy stability. Lower rates and a weaker currency hope to boost exports, dampened by a slowdown in China's economy, currently Australia's biggest export market.

The recent rush to ease rates by other global central banks spurred the RBA’s move in order to prevent its currency from rising against other currencies. 

Political Instability

Mass speculation looms over the future of the nation's Prime Minister, Tony Abbott. Due to voter resentment in state-level elections and a major decline in his approval ratings, there are talks of a party defection against his leadership.