Reserve Bank of Australia in surprise interest rate cut

RBA Governor Glenn Stevens has held rates but warned further cuts may be needed. Photo / Getty Images

Transtasman currencies take a bath amid speculation that the Reserve Bank of New Zealand may follow suit.

The New Zealand dollar dropped sharply in sympathy with its Australian counterpart after the Reserve Bank of Australia (RBA) surprised the market by cutting its overnight cash rate, fuelling speculation that the Reserve Bank of New Zealand may follow suit.

The RBA, noting the decline in commodities prices, very low inflation, slow growth and rising unemployment, cut its overnight cash rate by 25 basis points to 2.25 per cent - its lowest ever point. In the hectic trading that followed, both the aussie and the kiwi were sharply sold down.

The kiwi, trading at US72.91c just before the RBA announcement at 4.30pm, dropped by about US1c to US71.94c before recovering a little.

The aussie, which sat at US78.01c pre-announcement, dropped by US1.5c to US76.50c - its lowest point since May 2009 - before firming. The NZ/Australian dollar cross rate improved in New Zealand's favour, rising to A94.11c from A93.48c.

"The kiwi tends to follow the aussie in sympathy, regardless of expectations, but there is today an element of expectation that the Reserve Bank of NZ may follow suit," said Bank of New Zealand currency strategist Raiko Shareef.

Shareef noted that the RBA gave no hints about the future interest rate track and had therefore introduced the possibility that another cut might follow before the year was out.

RBA Governor Glenn Stevens said commodity prices have continued to decline, in some cases sharply and that lower oil prices would mean lower inflation.

"In Australia the available information suggests that growth is continuing at a below-trend pace, with domestic demand growth overall quite weak. As a result, the unemployment rate has gradually moved higher over the past year," he said.

"Overall, the bank's assessment is that output growth will probably remain a little below trend for somewhat longer, and the rate of unemployment peak a little higher, than earlier expected," he said.

Stevens said cutting rates would "add some further support to demand, so as to foster sustainable growth and inflation outcomes".

The rate cut was predicted by just seven of 29 economists surveyed by Bloomberg News, with the remainder forecasting no change. The RBA last reduced rates 18 months ago.

The RBA's move follows a string of surprise easings by the central banks of India, Canada, Singapore, Denmark and by the European Central Bank over the last few weeks.

The Reserve Bank of New Zealand last week abandoned its tightening stance and instead raised the possibility that it could cut its official cash rate from the current level of 3.5 per cent.

By the close of trade, the market's attention was turning to a speech Reserve Bank of NZ Governor Graeme Wheeler is scheduled to give today, which may give some clues as to the bank's next move.

Rate cut

• Reserve Bank of Australia cuts overnight cash rate by 25 basis points to 2.25%.

• RBA noted the decline in commodities prices, low inflation, slow growth and rising unemployment.

• Cut surprised the market and fuelled speculation NZ might follow suit.