fundamental alert

The Reserve Bank of Australia slashed its benchmark cash rate by 100bp to 4.25%. Economists expected a cut of 75bp to 4.50%.

The RBA's announcement stated "together with the spending measures announced by the Government" that "significant policy stimulus will be supporting demand over the year ahead." The statement offers a signal that from here on, government spending will be the primary tool used in combating the effect of the global slowdown. Deputy Governor Ric Battellino hinted at this last month, saying that the bank might be forced to halt its easy-money campaign due to inflation's possible return.

Furthermore, "the Board will continue to monitor developments and make adjustments as needed to promote sustainable growth consistent with achieving the 2–3 per cent inflation target over time." As such, rate moves will probably take a back seat and will more likely be geared towards assuring that inflation remains within the bank's target band.

Such an announcement could indicate the end of the declining Australian Dollar trend seen since July. Part of the decision to rely more on fiscal stimulus came because of the "large fall in the Australian dollar exchange rate," the statement said. October saw the Reserve Bank buy A$3.15 billion in the foreign exchange market in an effort to prop the domestic currency.

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