The Reserve Bank has now delivered the first of at least two official rate cuts that financial markets have pushed for and fully priced in. While the market celebrated last week’s move, with yields falling and the share market posing solid gains, there was not much in the announcement by RBA Governor Glenn Stevens that was especially encouraging.
Economic growth is below trend, unemployment is higher than expected and domestic demand is weak. With a weak economic outlook going forward, the market is pricing in the certainty of more cuts and this has seen short term yields rally (fall) to meet these views. It appears that the official cash rate is headed towards 2%, the lowest level in more than 50 years.