The share market jumped and the Australian dollar tumbled after the Reserve Bank of Australia (RBA) cut interest rates to a fresh record low of 0.75% this afternoon.
While many economists were expecting the cut, the decision still caused the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index to bounce from near flat to 0.5% as the local dollar turned the other way as it fell from US67.6 cents to US67.3 cents.
It wasn't so much the rate cut per-se that caused the abrupt moves but comments from the RBA Governor Philip Lowe, in my view.
Here are three things that stood out for me in the statement of monetary policy that was released with the rate decision.
Failing to reach escape velocity
The "gentle" turnaround in the Australian economy in the second half of the year may be reassuring but it isn't enough to keep Australia out of trouble.
Our central bankers noted that the economy expanded below trend at 1.4% for the year to the June quarter but things are slowing picking up since.
Nonetheless, the improvement is too weak and there're probably questions about its sustainability, otherwise I don't think the RBA would have felt the need to cut rates today.
Twisting the arms of consumers
This leads me to the second point. The RBA is using low rates to loosen the fists of consumers when it comes to spending.
A recent interview of Aussies on the street by the ABC recently found that most were planning on using the tax cut to pay down debt or to save the windfall. This isn't what the government or RBA wants to hear.
Push rates low enough and consumers may find it's not worth their while to repay debt when loans are so cheap or to save the extra cash.
"The low level of interest rates, recent tax cuts, ongoing spending on infrastructure, signs of stabilisation in some established housing markets and a brighter outlook for the resources sector should all support growth," said Dr Lowe.
"The main domestic uncertainty continues to be the outlook for consumption, with the sustained period of only modest increases in household disposable income continuing to weigh on consumer spending."
More needed
I think the comments from Dr Lowe will reinforce the belief that more needs to be done by the RBA – either in terms of another rate cut or ever two, or quantitative easing (maybe both).
While our head central banker pointed out some positives (economic data isn't actually so bad), there's too much slack in the local economy and I believe it's fear that things could suddenly turn a lot worse that is driving the RBA's thought process here.
Our monetary policy makers' hands are also forced by other central bankers around the world when it acknowledged that it had to consider "the forces leading to the trend to lower interest rates globally and the effects this trend is having on the Australian economy and inflation outcomes".
Australia is an island, but clearly that isn't the same for our economy.
