Australia cuts rate another 25 bps and ready to cut again

3rd July 2019 Off By binary

By CentralBankNews.info

Australia’s central bank lowered its benchmark cash rate for the second month in a row amid sluggish economic growth and inflation and said it was ready to lower rates further.
The Reserve Bank of Australia (RBA) cut its cash rate by 25 basis points to a new historic low of 1.0 percent and has now cut it by 50 percent this year following a cut in June as interest rates continue their steady but consistent decline since November 2011.
“This easing of monetary policy will support employment growth and provide greater confidence that inflation will be consistent with the medium-term target,” RBA said, adding lower interest rates will also help reduce the economy’s spare capacity.
Looking ahead, RBA’s board said it would continue to monitor the labour market “and adjust monetary policy if needed to support sustainable growth in the economy and the achievement of the inflation target over time.”
In a speech in at a community dinner in the city of Darwin shortly after RBA’s decision, Governor Philip Lowe added the two back-to-back rate cuts will put the economy on a better path toward winding back spare capacity and RBA was “prepared to adjust rates again if needed to get us closer to full employment and achieve the inflation target…”
RBA’s rate cut today was widely expected following Lowe’s comments on June 20 that it would be unrealistic to expect the first rate cut on June 4 to materially shift the economy’s current path and “it is not unrealistic to expect a further reduction in the cash rate.”
RBA repeated its view from last month that the outlook for the global economy remains “reasonable” but the risks are still tilted to the downside and the uncertainty generated by trade and technology disputes were affecting investment, boosting expectations of easier monetary policy by major central banks and lowering borrowing costs to historically low levels.
As an example, Lowe in Darwin noted the Australian government can now borrow money for 10 years at around 1.3 percent, the lowest rate since 1901 when the former six British colonies became a federation.
A softer economy and RBA’s easing has also helped lower the exchange rate of the Australian dollar since January 2018, with the Aussie today trading at 1.43 to the U.S. dollar, down 0.7 percent since the start of this year and down 10.5 percent since the start of 2018.
Australia’s economy has slowed in the last 3 quarters, with annual growth in the first quarter of 1.8 percent, down from 2.3 percent in the previous quarter, and below RBA’s forecast from May for growth this year of 2.75 percent.
RBA said its outlook for economic growth “remains reasonable,” but added consumption was subdued and weighed down by a long period of low income and declining house prices. But higher investment in infrastructure and the resource sector is helping offset some of this drag.
Although employment growth has been strong and labor force participation at record levels, Lowe noted the jobless rate has risen in the last two months to 5.2 percent in May, and growth in wages remains low, making little inroads into the economy’s spare capacity.
Inflation is also subdued – it fell to 1.3 percent in the first quarter from 1.8 percent in the previous quarter – but RBA said it would be boosted in the second quarter by higher petrol prices and the central scenario remains for underlying inflation to be around 2.0 percent in 2020.

The Reserve Bank of Australia issued the following statement:

“At its meeting today, the Board decided to lower the cash rate by 25 basis points to 1.00 per cent. This follows a similar reduction at the Board’s June meeting. This easing of monetary policy will support employment growth and provide greater confidence that inflation will be consistent with the medium-term target.

The outlook for the global economy remains reasonable. However, the uncertainty generated by the trade and technology disputes is affecting investment and means that the risks to the global economy are tilted to the downside. In most advanced economies, inflation remains subdued, unemployment rates are low and wages growth has picked up. The slowdown in global trade has contributed to slower growth in Asia. In China, the authorities have taken steps to support the economy, while continuing to address risks in the financial system.
Global financial conditions remain accommodative. The persistent downside risks to the global economy combined with subdued inflation have led to expectations of easing of monetary policy by the major central banks. Long-term government bond yields have declined further and are at record lows in a number of countries, including Australia. Bank funding costs in Australia have also declined, with money-market spreads having fully reversed the increases that took place last year. Borrowing rates for both businesses and households are at historically low levels. The Australian dollar is at the low end of its narrow range of recent times.
Over the year to the March quarter, the Australian economy grew at a below-trend 1.8 per cent. Consumption growth has been subdued, weighed down by a protracted period of low income growth and declining housing prices. Increased investment in infrastructure is providing an offset and a pick-up in activity in the resources sector is expected, partly in response to an increase in the prices of Australia’s exports. The central scenario for the Australian economy remains reasonable, with growth around trend expected. The main domestic uncertainty continues to be the outlook for consumption, although a pick-up in growth in household disposable income is expected to support spending.
Employment growth has continued to be strong. Labour force participation is at a record level, the vacancy rate remains high and there are reports of skills shortages in some areas. There has, however, been little inroad into the spare capacity in the labour market recently, with the unemployment rate having risen slightly to 5.2 per cent. The strong employment growth over the past year or so has led to a pick-up in wages growth in the private sector, although overall wages growth remains low. A further gradual lift in wages growth is still expected and this would be a welcome development. Taken together, these labour market outcomes suggest that the Australian economy can sustain lower rates of unemployment and underemployment.
Inflation pressures remain subdued across much of the economy. Inflation is still, however, anticipated to pick up, and will be boosted in the June quarter by increases in petrol prices. The central scenario remains for underlying inflation to be around 2 per cent in 2020 and a little higher after that.
Conditions in most housing markets remain soft, although there are some tentative signs that prices are now stabilising in Sydney and Melbourne. Growth in housing credit has also stabilised recently. Demand for credit by investors continues to be subdued and credit conditions, especially for small and medium-sized businesses, remain tight. Mortgage rates are at record lows and there is strong competition for borrowers of high credit quality.
Today’s decision to lower the cash rate will help make further inroads into the spare capacity in the economy. It will assist with faster progress in reducing unemployment and achieve more assured progress towards the inflation target. The Board will continue to monitor developments in the labour market closely and adjust monetary policy if needed to support sustainable growth in the economy and the achievement of the inflation target over time.”
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