Australia cuts rate another 25 bps and ready to cut again3rd July 2019
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.
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