Australia's central bank on Tuesday opened the door to the first cut in interest rates for seven years, saying slowing demand and tight financial conditions were set to bring inflation down over time.
The Australian dollar slid half a U.S. cent and bonds rallied as investors priced in the first cut by September, perhaps even by half a percentage point.
While the Reserve Bank of Australia (RBA) left key rates steady at a 12-year peak of 7.25 percent at its August policy meeting, its statement clearly signalled a bias toward easing.
"With demand slowing, the Board's view is that scope to move towards a less restrictive stance of monetary policy in the period ahead is increasing," RBAGovernor Glenn Stevens said in a brief statement announcing the decision.
Given the global credit squeeze, rising fuel costs and falling asset values it was looking more likely that demand would remain subdued and economic growth would slow, said Stevens.
Inflation would remain high in the short term, having hit a 17-year peak of 4.4 percent last quarter. But the central bank was now more confident that inflation would slow to within its 2 to 3 percent target band by 2010.
"A rate cut in September is now almost certain," declared Rory Robertson, interest rate strategist at Macquarie.
Investors seemed to agree, with interest rate swaps showing a probability of around 92 percent for a 25 basis-point cut next month.
That marked a major turnaround from just a couple of months ago when markets were betting on a hike to 7.5 percent, following rate rises in February and March.
The Australian dollar slid half a U.S. cent and bonds rallied as investors priced in the first cut by September, perhaps even by half a percentage point.
While the Reserve Bank of Australia (RBA) left key rates steady at a 12-year peak of 7.25 percent at its August policy meeting, its statement clearly signalled a bias toward easing.
"With demand slowing, the Board's view is that scope to move towards a less restrictive stance of monetary policy in the period ahead is increasing," RBAGovernor Glenn Stevens said in a brief statement announcing the decision.
Given the global credit squeeze, rising fuel costs and falling asset values it was looking more likely that demand would remain subdued and economic growth would slow, said Stevens.
Inflation would remain high in the short term, having hit a 17-year peak of 4.4 percent last quarter. But the central bank was now more confident that inflation would slow to within its 2 to 3 percent target band by 2010.
"A rate cut in September is now almost certain," declared Rory Robertson, interest rate strategist at Macquarie.
Investors seemed to agree, with interest rate swaps showing a probability of around 92 percent for a 25 basis-point cut next month.
That marked a major turnaround from just a couple of months ago when markets were betting on a hike to 7.5 percent, following rate rises in February and March.
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