Surprise interest rate cut from RBA

Well, it didn't take long for interest rates to again be a major focal point for Aussie consumers and businesses.

In fact, it was just 33 days into the new year when the Reserve Bank board elected to cut interest rates to the lowest levels on record. And it has proved a very interesting decision.

Rewind to the December 2 board meeting and there were no signs of an interest rate cut on the horizon. The bank ended the year merely stating that "the most prudent course is likely to be a period of stability in interest rates".

So what changed?

Well, a key consideration has been the softening of both the European and Japanese economies. The key concern for policymakers in both economies is that the weak demand could lead to deflation (falling prices) or, at the very least, significant disinflation (sharply slowing rates of inflation).

In response, Japanese policymakers accelerated bond purchases (effectively printing money) and the European Central Bank unveiled its own bond-buying program.

Also, over the past few months, a number of central banks have actually eased monetary policy.

Canada and Denmark are among those that have cut rates, China cut its reserve requirement for banks and New Zealand shifted to a "neutral" monetary policy stance and financial markets are pricing in interest rate cuts in coming months.

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