Comment – by Neil Burgess, senior commodities analyst, Westpac Agribusiness

While Australia was waiting for the ‘Race that stops the Nation’, the Melbourne Cup on Tuesday, the Reserve Bank of Australia delivered a cut to the overnight cash rate by 25 basis points, to now stand at 4.5 percent.

This is the first rate cut since April, 2009.

There are a number of factors behind the RBA’s decision to cut rates, but certainly the most import is the level of inflation.

In the RBA Governor’s own words, “Inflation is likely to be consistent with the 2–3 percent target in 2012 and 2013.”

With the RBA indicating that it considers the rate of inflation to be within its target range for an extended period of time, this will allow time to concentrate its efforts on the Australian economy, which appears to be showing only moderate rates of growth.

Indeed, the labour market has showed a sign of softening as the unemployment rate has started to increase, together with ‘subdued’ consumer demand and the household sector showing ‘cautious behaviour’. Together they have contributed to a weakening growth outlook.

Tomorrow, November 4, the RBA will release its Quarterly Statement on Monetary Policy, which will provide a fuller explanation behind the RBA’s decision to cut the overnight cash rate.

Upon the announcement of the rate cut, the Australian dollar immediately lost ground against the US dollar, despite the fact that many in the market had already factored-in a rate cut. 

However, the Australian dollar still remains well supported above the parity level against the US dollar.