Interest Rate in Australia

Australia - Interest Rate

RBA cuts rates in June on weak inflation and higher unemployment

At its 4 June monetary policy meeting, the Reserve Bank of Australia (RBA) cut the cash rate to a fresh all-time low of 1.25% from 1.50%, where it had been since August 2016. The move matched expectations of a rate cut due to low inflation and subdued economic activity. Moreover, the RBA did not rule out a further rate cut in case the labor market underperforms.

Stubbornly-low inflation, a pick-up in unemployment and heightened global trade tensions were behind the Bank’s decision to reduce the policy rate. Inflation slowed to 1.3% in Q1 from Q4’s 1.8%, landing further below the Bank’s 2.0%–3.0% target, while the unemployment rate rose to 5.2% in April from March’s 5.1%. Moreover, subdued retail sales in Q1 and the first drop in retail sales in April point to a further weakening in consumer spending, which is being weighed down by sluggish wage growth, high levels of debt and a continued—albeit recently softening—correction in house prices. That said, robust non-mining business and infrastructure investment continues to underpin economic activity, while wage growth is picking up some steam. Against this backdrop, the Bank projects underlying inflation of 1.8% in 2019, before accelerating to 2.0% in 2020.

The Reserve Bank of Australia cited exacerbating global trade disputes and weakening investment intentions as the main downside risks to the global outlook. The communiqué suggests the RBA will leave the doors open to some further monetary policy loosening in the near-term, which will ultimately depend on the evolution of the labor market and spare capacity utilization.

FocusEconomics panelists are still weighing up the Bank’s latest decision.