Early indications were that the Reserve Bank's most recent interest rate cut would also be its last, but it seems that a lot can change in just three days.
The RBA cut the official cash rate to a record low 2 per cent on Tuesday which ought to have pleased the markets no end. Instead, the stock market plummeted and the Australian dollar skyrocketed (both opposite reactions to what would ordinarily occur) after the decision due to the commentary provided by the Board.
In months gone by, the Board had referred to the fact that "further easing of policy may be appropriate in the period ahead", suggesting that it was open to cut rates further if need be. In its most recent announcement however, it removed that line and said the US Federal Reserve was expected to begin hiking interest rates later this year.
The Bank also said that "further depreciation (of the Australian dollar) seems both likely and necessary". All in all, it appeared to be saying that "we're not going to cut interest rates any further, but will instead rely on the US Federal Reserve to strengthen the US dollar, and hence weaken the Australian currency."
As has been widely reported, the RBA's latest attempt at "jawboning" has left a trail of destruction. While it hoped its interest rate cut would force the Australian dollar below US75 cents, it has instead pushed it to around US79 cents. Meanwhile, the local sharemarket has also crumbled, led by popular high-yield dividend stocks such as Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and even Telstra Corporation Ltd (ASX: TLS).
Although significant, the dollar and the sharemarket aren't the RBA's only concerns. Commodity prices remain heavily depressed, the national income is expected to remain weak for years, the federal deficit is expected to balloon out and, to top it off, the latest figures from the Australian Bureau of Statistics showed an increase in the national unemployment rate in April.
As it stands, most economists believe that the latest round of interest rate cuts has drawn to a close, but if conditions don't improve in the near future, the RBA could well be forced to provide even more stimulus.
