Australia cuts interest rate to record low of 1.5%
AUSTRALIA’S central bank dropped interest rates to a new record low yesterday after a recent run of soft inflation readings, with some economists forecasting further cuts ahead.
The 25-basis-point cut to 1.5 percent means the Reserve Bank of Australia (RBA) has slashed rates by 300 basis points since November 2011 to support the economy as it transitions toward non-resources growth after a mining investment boom.
“The board judged that prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting,” bank governor Glenn Stevens said in a statement. The decision follows official figures last month showing that consumer prices fell to a 17-year annual low of 1.0pc in April-June, well off RBA’s inflation target of 2.0-3.0pc.
Treasurer Scott Morrison denied that the cut was a sign of a struggling economy, saying that Australia was posting 3.1pc growth, while Mr Stevens said it was unlikely to overheat the housing market.
The majority of economists had forecast that the RBA, an inflationtargeting central bank, would cut interest rates, with 20 out of 25 surveyed by Bloomberg News predicting the move.
Commenting on the global economy, Mr Stevens noted that the underlying pace of growth in Australia’s largest trading partner China “appears to be moderating”.
Australia has been growing more strongly than most of the world’s advanced economies but like most countries is struggling to kickstart inflation, with oil prices subdued and global trade tepid.
Wages growth has also remained soft, while “labour market indicators continue to be somewhat mixed but are consistent with a modest pace of expansion in employment in the near term”, Mr Stevens said.
The rate cut is expected to take some time to feed through to possibly pushing up consumer prices, with the RBA’s own forecasts in May expecting inflation to only lift towards the target band in late 2017 or in 2018.
Leading Australian economist, Bill Evans of Westpac Bank, said the RBA was expected to sit on the sidelines and observe the next few growth and inflation readings before acting again, with uncertainty about the global economic environment also a key factor.
“For us the real issue will be the environment in 2017 when the housing cycle will be in reverse; jobs growth may have cooled; global growth, particularly in this region, will have slowed further; and Australia’s interest rates may still be attractive to international investors,” Mr Evans said. –
Glenn Steven says Australia's growth rate is moderating.