Article by ForexTime
The Australian dollar plunged over one percent against its US counterpart in reaction to the announcement from the Reserve Bank of Australia cut its benchmark rate by 0.25 basis points to a record low 1.75%.
In a statement released by the central bank today, it noted its concerns about deflation.
“Inflation has been quite low for some time and recent data were unexpectedly low. While the quarterly data contain some temporary factors, these results, together with ongoing very subdued growth in labour costs and very low cost pressures elsewhere in the world, point to a lower outlook for inflation than previously forecast.”
AUDUSD dropped to $0.7576 soon after the RBA decision, from as much as $0.7719 before the decision.
Last month the RBA left its benchmark rate unchanged at 2 per cent. The RBA previously cut rates twice in 2015.
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There has been plenty of pressure on the RBA to ease further. The RBA’s inflation target is between 2 and 3 per cent, but the most recent data showed that the trimmed mean of consumer price inflation (CPI) – the RBA’s preferred measure – rose 1.7 per cent year-on-year in the first quarter, well short of this. It was the slowest rate of CPI since 1999.
Meanwhile, a strong exchange rate also pressured the RBA to cut rates. The Australian dollar had been gaining strength recently, by around 5.4 per cent since the beginning of the year. A strong aussie is bad news for an economy which wants its exports to be competitive and an ever-expanding tourist industry.
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