As expected the RBA cut its benchmark rate by 25bp to 3.00% ignoring speculation that the central bank may opt for a more dramatic 50bp move and as a result the Australian dollar rallied rising to 1.0450 in the aftermath of the rate decision. The RBA followed its gradualist path, noting that, ‘‘Global growth is forecast to be a little below average for a time. Risks to the outlook are still seen to be on the downside, largely as a result of the situation in Europe, though the uncertainty over the course of US fiscal policy is also weighing on sentiment at present. Recent data suggest that the US economy is recording moderate growth and that growth in China has stabilised. Around Asia generally, growth has been dampened by the more moderate Chinese expansion and the weakness in Europe.”

The central bank has now taken rates to Lehman crisis lows but as several analysts have pointed out monetary conditions in Australia are not as accommodative as may seem with banks widening their spread on variable rate mortgages. Mortgages reached a low of 5.1% in 2009, whereas now they are expected to fall to about 5.65% after today’s cut.

In the end the central bank left the market with a decidedly neutral bias noting that, ‘‘Over the past year, monetary policy has become more accommodative. There are signs of easier conditions starting to have some of the expected effects, though the exchange rate remains higher than might have been expected, given the observed decline in export prices and the weaker global outlook. While the full effects of earlier measures are yet to be observed, the Board judged at today’s meeting that a further easing in the stance of monetary policy was appropriate now. This will help to foster sustainable growth in demand and inflation outcomes consistent with the target over time.’’

The RBA will not not meet until February and likely make an keep rates stationary for the foreseeable future allowing the rate cut effects to take place. It would only grow more accommodative if global growth suddenly showed signs of further weakening or if the internal Australian data deteriorated markedly. Although the yield on the Aussie continues to contract the pair still carries the highest rate in the industrialized world and as such will likely remain bid, although its rallies will be limited in scope with 1.05000 level remaining key resistance for now.