The best guide to the current economic turmoil in Western economies is Paul Krugman’s brilliant little book The Return of Depression Economics, and after today’s interest rate cut I’ve no doubt that it’s popular among the officials of the RBA. Based on domestic economic indicators there seems to be little reason to cut interest rates, as pointed out by Pete Faulkner (RBA opts for a cut) and market commentator Adam Carr, who has observed that the RBA is almost back at the monetary policy stance it had during the financial crisis (see this Australian report).
In my view, the RBA’s decision only really makes sense if it has embraced depression economics, and accepts that fear is driving up demand for cash and safe assets, such as bonds, and interest rates across the western economies will be low for a long time. Hence it doesn’t make sense to keep our interest rates much higher than in other countries and drive up our exchange rate to the detriment of our exporting sectors. Today’s decision by the RBA wouldn’t normally make sense, but it appears the RBA has accepted these are not normal times.