Australia: RBA cuts cash rate to record low in February
February 3, 2015
The Reserve Bank of Australia (RBA) cut the cash rate from 2.50% to a record-low 2.25% at its 3 February meeting. The decision, which was the first change the Bank has introduced since August 2013, came as a surprise to the markets, which had expected the cash rate to remain unchanged at 2.50%. The cut in the cash rate was motivated by the Bank’s view that domestic demand is quite weak. The Bank pointed out that, although the recent fall in oil prices is expected to support consumer spending this year, at the same time, a drop in the terms of trade is projected to reduce income growth significantly.
In its accompanying statement, the Bank stated that the global economy is continuing to grow at a moderate pace. While growth in the U.S. remains strong, growth in both the Euro area and Japan remains weak and is projected to continue to be sluggish this year. The Bank commented that the fall in global commodity prices is likely to support global growth going forward, however this is also expected to keep inflation rates at very low levels.
In regard to the domestic economy, the RBA pointed out that the Australian economy is expected to continue growing below trend, and that unemployment is likely to peak higher than earlier estimated.
The Bank said that, “taking into account the flow of recent information and updated forecasts, the Board judged that, on balance, a further reduction in the cash rate was appropriate. This action is expected to add some further support to demand, so as to foster sustainable growth and inflation outcomes consistent with the target.”
Author: Cecilia Simkievich, Economist