Reserve Bank of Australia cuts cash rate to record-low 1.5%
AP Photo/Bebeto Matthews
The Reserve Bank of Australia (RBA) cut interest rates by 25 basis points to a fresh record-low of 1.50% at its August monetary policy meeting, a decision that was expected by a majority of economists and those in financial markets.
On the reasoning for the decision, the board 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”.
On the outlook for inflation, the sole reason cited by many analysts to justify an additional rate cut, the board acknowledged that “recent data confirm that inflation remains quite low”.
“Given very subdued growth in labour costs and very low cost pressures elsewhere in the world, this is expected to remain the case for some time,” the statement read.
Contributing to weak inflationary pressures through heightened levels of labour market slack, the RBA noted that “labour market indicators continue to be somewhat mixed”, although acknowledged that it remains “consistent with a modest pace of expansion in employment in the near term”.
AP Photo/Bebeto Matthews
On the housing market, an area that some believed may prevent the RBA from cutting interest rates further due to recent strength in east coast prices, the board suggested that prices had risen only “moderately” this year.
It also suggested that greater levels of regulatory supervision, along with an increased supply of apartments in Australia’s eastern capitals, may place further downside pressure on prices in the period ahead.
“Supervisory measures have strengthened lending standards in the housing market,” read the statement. “The most recent information suggests that dwelling prices have been rising only moderately over the course of this year, with considerable supply of apartments scheduled to come on stream over the next couple of years, particularly in the eastern capital cities.”
Along with a recent slowdown in “lending for housing purposes”, the RBA judged that “the likelihood of lower interest rates exacerbating risks in the housing market has diminished”.
Outside of risks posed by the inflation outlook and housing market, the board continued to express cautious optimism towards other areas of the domestic economy.
“In Australia, recent data suggest that overall growth is continuing at a moderate pace, despite a very large decline in business investment. Other areas of domestic demand, as well as exports, have been expanding at a pace at or above trend,” it said.
As it has done in the past, the bank also suggested that prior interest rate cuts, along with a lower currency, is helping Australia’s trade-exposed sectors.
“These factors are all assisting the economy to make the necessary economic adjustments, though an appreciating exchange rate could complicate this,” it said.
Keeping with tradition, the board refrained from offering a rates bias in the final paragraph of the statement.
This should not be interpreted as a sign that the RBA easing cycle has come to a conclusion. It is not.
The full August monetary policy statement, released by RBA governor Glenn Stevens, can be accessed here.
Given most were expecting a reduction in interest rates, the market reaction has been muted to the decision. If it wan’t going to come in August, almost everyone thought it would arrive in the months ahead.
The Australian dollar is marginally weaker, trading at .7518 against the US dollar. It is down a minuscule 0.23% for the session (as at 3pm AEST).
Stocks, after initially jumping on the decision, have fallen into the red, mirroring the fortunes of the banks. The ASX 200 is currently down 0.55% at 5,556.6.
Australian bond futures are also stronger (yields lower) with 3 and 10-years up 4 and 3 ticks respectively.
Looking ahead, Australian cash rate futures are now 50/50 when it comes to the prospect of another rate cut in November, something that would take the cash rate to yet another record-low of just 1.25%.
Market attention will now turn to the release of the RBA’s quarterly statement on monetary policy (SOMP) on Friday. In May, when the prior SOMP was released, the bank made a series of downgrades to its inflation forecasts, paving the way for the rate cut delivered today.
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