Australia cuts interest rates to record low of 2.25%

Australia’s central bank has cut interest rates for the first time since 2013

SYDNEY — The Reserve Bank of Australia (RBA) has cut its benchmark interest rate to a record low of 2.25 percent on Tuesday in a bid to jolt an economy weighed down by falling commodity prices.

The cut was the first from the central bank in 18 months and was widely expected by financial markets. It came as a surprise to many economists, who expected the bank to hold off on lowering the rate until later in the year. Subdued inflation, however, has given the central bank more scope to stimulate Australia’s $1 trillion economy.

The news shook the Australian dollar which dropped 1.8 percent 76.5 cents. The stock market was boosted, with the S&P/ASX 200 up 1.5 percent.

Resource-rich Australia managed to avoid a recession during the global financial crisis thanks to a decade-long mining boom. But with the economy weakening in China, which is Australia’s largest export market, prices for commodities such as iron ore and coal have dropped.

“The available information suggests that growth is continuing at a below-trend pace, with domestic demand growth overall quite weak. As a result, the unemployment rate has gradually moved higher over the past year,” RBA Governor Glenn Stevens said in a statement on Tuesday.

In his statement, Stevens acknowledged the Australian dollar had declined noticeably, but said it remains above most estimates of its fundamental value. “A lower exchange rate is likely to be needed to achieve balanced growth in the economy,” he said.

Spiros Papadopoulos, senior economist at National Australia Bank, suspects the bank will cut the rate again later this year, though not at its next meeting.

“The combination of weak growth, further increases in unemployment and a very subdued inflation outlook has really given them that room to maneuver,” he said.

Bank of Queensland immediately cut its standard variable mortgage rate by 25 basis points to 4.45 per cent.

In its statement, the RBA highlighted Australia’s sub-trend growth, declining inflation and commodity prices, global uncertainty and the relative strength of the Australian dollar against its trading competitors and partners, despite a 20 per cent decline against the US dollar.

“For the past year and a half, the cash rate has been stable, as the Board has taken time to assess the effects of the substantial easing in policy that had already been put in place and monitored developments in Australia and abroad,” it said.

“This action is expected to add some further support to demand, so as to foster sustainable growth and inflation outcomes consistent with the target,” the bank said.

The easing has been widely expected, being priced at close to a 70 per cent possibility in the futures markets.

Nonetheless, the Australian dollar immediately lost about US1.5¢, to a new five-and-a half year low around US76.60¢.

Economists immediately started pricing in a second 25 basis point cut, perhaps as early as next month.

“The tone of the statement is quite dovish, with obvious concern for underlying growth in domestic demand,” said ANZ chief economist Warren Hogan.

Recommended For You

About the Author: Akhtar Jamal

Tribune International