Australia: RBA cuts cash rate by 25 basis points
May 3, 2016
Amid lackluster inflation expectations and a challenging external environment, the Reserve Bank of Australia (RBA) lowered the cash rate from 2.00% to 1.75% at its May 3 meeting. The cut took markets by surprise as it was widely expected that the RBA would leave rates unchanged as they have since May 2015. The decision followed weaker-than-expected inflation in the first quarter of the year, which, combined with low wage growth and weak global inflation, has pushed down domestic inflation expectations.
Alongside weak global inflation, global growth has also remained subdued. Regarding the global environment, the RBA noted that China’s economy has slowed in the first part of year, however, Chinese policy makers have pledged to prop up growth with expansionary policies. Advanced economies remain the engines of global growth. As a whole, global growth is weaker than expected. Although the decline in commodity prices has stabilized in recent months, Australia’s external position remains much weaker than it was in past years. Financial market volatility that had characterized the first two months of the year has subsided. That being said, heightened uncertainty continues to cloud the outlook for advanced economies. After the RBA’s decision was announced, the Australian dollar weakened in comparison to the USD. The RBA has indicated that it is concerned that a stronger AUD, which has appreciated by over 15% since January, could jeopardize already-weak inflationary pressures.
Domestically, Australia’s rebalancing act is progressing. As the country’s economy shifts from a dependence on mineral-extraction-related-activities to a service-sector-based economy, GDP growth and labor market conditions remain robust. The RBA noted that indicators suggest that growth will continue into 2016, albeit at a more moderate pace. The RBA stated that although the weak Q1 reading was partly due to some temporary factors, inflationary pressures are weak in general.
The RBA’s decision comes during a period of what it considers to be “accommodative” monetary policy. Credit issued to households and businesses is steadily increasing, which is supporting the economy through its transition. Meanwhile, the risks associated with an over-heated housing market are moderating as authorities have clamped down on lending to speculative and investment properties.
May’s monetary policy meeting was of particular salience as it occurred less than a day before the federal budget was released. The budget was seen as largely expansionary and should work in tandem with the RBA’s decision to support inflation and bolster growth over the forecast period.
The RBA stated 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.” The next policy meeting is scheduled for 7 June.
Author: Robert Hill, Economist