Rate Cut

The Reserve Bank of Australia has cut the official cash rate to 1.50% from 1.75% at its August meeting, a move of 0.25 percentage points, citing inflation that remains well below the bank’s target range of 2–3% and sluggish growth in the global and Chinese economies.

 

The move marks the first rate cut since May this year when the bank cut the cash rate by 0.25 percentage points to 1.75%, also citing lower-than-expected inflationary pressures.

 

In his statement on the decision, RBA governor Glenn Stevens said recent data confirmed that inflation was still quite low and that “subdued growth in labour costs”, along with “very low cost pressures in the rest of the world”, indicated that inflation was set to stay low for some time.

 

The governor noted that the Australian economy was continuing to grow at a moderate pace, and while labour market data was mixed, the indicators were consistent with a “modest pace of expansion of employment in the near term”.

 

The RBA said domestic demand had been supported by low interest rates, while a lower exchange rate against the US dollar since 2013 has aided the export sector – both of which are helping the economy transition from the mining boom and adjust to the associated “very large decline in business investment”. The bank cautioned, however, that an appreciation in the exchange rate would make this adjustment more difficult.

 

Shortly before Tuesday’s decision, the market had been pricing in a 73% chance of a cut in the cash rate.

 

Ord Minnett now sees the RBA on hold for the remainder of 2016, with a further 0.5 percentage points of easing likely in the first half of 2017 as low inflation proves to be more persistent than expected.

 

The August meeting was the last-but-one for governor Stevens who ends his 10-year term in the middle of September, when deputy governor Philip Lowe steps into the top job. 

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