Australia: RBA cuts cash rate to record low in May
May 5, 2015
The Reserve Bank of Australia (RBA) decided to lower the cash rate from 2.25% to a record low of 2.00% at its 5 May meeting. The decision was in line with market expectations and is the latest in the RBA’s easing cycle that started in February when the bank cut rates for the first time in 20 months, reducing it to 2.25% from 2.50%.
In its accompanying statement, the Bank stated that the global economy is continuing to grow at a moderate pace, but that commodity prices have fallen. These lower prices are the result of increased supply from producers, including Australian suppliers. The RBA also stated that central banks across the world are engaging in an unconventional easing of policy rates, which has resulted in remarkably-low long term borrowing rates.
Meanwhile, the Australian economy has enjoyed improved trends in consumer demand over the course of the past six months as well as robust employment numbers. However, risks going forward include decreased capital expenditure in both the mining and non-mining sectors. Furthermore, a reduction in public expenditure will also hinder growth going forward. Although the AUD has depreciated against the USD over the past year, it has still over preformed in comparison to other currencies. A further depreciation of the AUD is probable, especially given the low prices of Australian commodity exports. The Bank commented that, “the economy is (…) likely to be operating with a degree of spare capacity for some time yet. Inflation is forecast to remain consistent with the target over the next one to two years, even with a lower exchange rate.”
Currently, low rates are supporting borrowing and spending, as well as propping up the equity and commercial property markets. The RBA stated that, “the inflation outlook provided the opportunity for monetary policy to be eased further, so as to reinforce recent encouraging trends in household demand.”
Author: Robert Hill, Economist