Australia: RBA cuts interest rate in August to record low
August 2, 2016
At its 2 August monetary policy meeting, the Reserve Bank of Australia (RBA) cut its policy rate by 25 basis points from 1.75% to a new all-time low of 1.50%. The decision met market expectations and came against a backdrop of multi-year-low inflation, sluggish wage growth and subdued risks to the housing market in spite of low interest rates.
In its accompanying statement, the RBA pointed out that the global economy is continuing to grow, albeit at a slower pace. Global economic growth is following two divergent trends with developed economies recording improved conditions over the past year while emerging economies are facing mounting pressure. The Bank noted that the Chinese fiscal stimulus is providing a short-term support to the economy, but economic data point to a steady deceleration. Lastly, the Bank said that monetary policies across the world remain accommodative and that, “financial markets have continued to function effectively.”
Regarding the Australian economy, the RBA highlighted that the latest economic data suggest that economic growth continues, “at a moderate pace, despite a very large decline in business investment.” Other components of the domestic economy, as well as exports, are growing at an average or above-average rate. Labor market data, on the other hand, are mixed but still point to a modest expansion.
The latest inflation report released on 29 July by the Australian Bureau of Statistics showed that inflation had dropped from 1.3% in Q1 to a 17-year low of 1.0% in Q2. The annual average inflation rate in Q2 inched down to 1.4% (Q1: 1.5%), falling further below the RBA’s inflation target of 2.0%–3.0%. The Bank expects inflationary pressures to remain muted due to slow increases in labor costs and low cost pressures across the world. The RBA expects this scenario to remain in place for some time.
Furthermore, the Bank downplayed the risks of lower interest rates on the housing market. According to the Bank, supervisory measures have strengthened lending standards in the market and lenders have become more cautious as well. The Bank pointed out that a surge in housing supply in Australian cities will keep price pressures muted and concluded that, “the likelihood of lower interest rates exacerbating risks in the housing market has diminished.”
Against this backdrop, the Board, “judged 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.”
Regarding the prospect of future rate cuts, Economist Chidu Narayanan from Standard Chartered argues that:
“We believe that the hurdle for further RBA rate cuts is high. […] we believe the RBA is cautious about risks to financial stability at current low interest rates. We expect it to maintain the rate at 1.50%. The quarterly inflation print remains key; we believe Q3 inflation data, due on 26 October, will be a decisive factor for further RBA action. A risk to our call is a still-weak Q3 print – a downside surprise would increase expectations of further RBA easing.”
Author: Robert Hill, Economist