The first week of April saw a bit of a shift in the financial markets, as a central bank that was expected to cut rates decided not to do so.  On April 7, the Reserve Bank of Australia (RBA) surprised markets by keeping its benchmark interest rate unchanged at 2.25%, a stark contrast to the action in much of the rest of the world where rates have hit new lows – in some instances, below zero. 

This is very different from what we have seen in the first few months of this year, with over 20 central banks seemingly rushing to cut rates.  In many instances, these cuts were unexpected.  Much of this race to the bottom for interest rates was the result of a wave of worry about global growth and economic recovery.

So is the action of the RBA a sign of a change in the thinking of economic policymakers?  Not necessarily, but it has made the market step back and reassess.  

Many central banks decided to take unprecedented measures to preemptively cut rates earlier this year, some exceeding expectations and moving into negative territory.  Their thinking was that this move would get their economies moving again.  So the first thing that we read from RBA’s inaction is that central banks are waiting to see how well these extreme measures play out in boosting economic growth.

We also wonder whether this wait-and-see period will affect the timing of the U.S. Federal Reserve’s monetary policy decisions.  The Fed may decide to hold off on tightening for some period of time, especially after the dismal U.S. labor market report released earlier this month.

Our View:  We realize that in this unprecedented deflationary global environment many central banks’ monetary policies seem to be almost trial and error. That’s not necessarily bad, because it also means they are willing to be as flexible as possible, and take some unconventional measures, rather than watching economies slowly decay.

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