Aussie Reserve Bank and Government Act

It is likely that today will be remembered as the day that the Australian economy got a massive policy jolt. On the fiscal policy side, the Government followed up on the October Economic Security Strategy, worth $10.4 billion, with today's announcement of its Nation Building and Jobs Plan, worth $42 billion over the next three and half years. The stimulus is broadly split between a $28.8 billion spend on infrastructure and a further $12.7 billion of one-off cash handouts to low and middle income households, starting from March - April this year.

The $28.8 billion spend on various infrastructure initiatives, given the longer lead times for these projects, will be spent from 2009 - 2010 onwards with $16 billion of the $28.8 billion projected to be spent during that period. The Treasury estimates that the total package will add around 0.5% to growth in 2008 - 2009 and 0.75% to 1% over 2009 - 2010.

On the monetary policy side, the Reserve Bank of Australia (RBA) today eased by 100 basis points, reducing the cash rate to 3.25%; the lowest level in the modern monetary policy era. The RBA said today, “the combination of expansionary monetary and fiscal policies now in place will help to cushion the Australian economy from the contractionary forces coming from abroad”.

In the market, the $Aussie liked the move at first – probably just a little relief rally – then changed its mind. At around 63-64cents, the market is really not telling us too much.



The stock market chose to ignore the news, having a rather flat day.