Australia cuts rate 25 bps on moderating growth in China

August 2, 2016

By CentralBankNews.info
    Australia’s central bank cut its benchmark cash rate by 25 basis points to 1.50 percent, as expected by many economists, with the bank pointing to diminishing risks that lower interest rates will exacerbate risks in the housing market and expressing its concern that “the underlying pace of China’s growth appears to be moderating.”
    The Reserve Bank of Australia (RBA) has now cut its rate by 50 basis points this year following a similar-sized cut in May.
    The RBA did not give any guidance about the direction of monetary policy in the future and merely said that the “prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting.”
     As in recent months, the RBA said low interest rates were supporting domestic demand and the lower exchange rate since 2013 was helping the traded sector while financial institutions were in the position of being able to help.
    “These factors are all assisting the economy to make the necessary economic adjustments, though an appreciating exchange rate could complicate this,” RBA Governor Glenn Stevens said in his statement.
     The Australian dollar has been firming since mid-January but remains far below par to the U.S. dollar that was seen from 2011 to early 2013. Today the Australian dollar, known as the Aussie, was trading at 1.327 to the U.S. dollar, up 3.2 percent since the start of this year.
    Inflation in the second quarter eased to 1.0 percent from 1.3 percent in the first quarter, well below the RBA’s target of 2-3 percent, and Stevens said inflation is expected to remain “quite low,” given subdued growth in labor costs and low cost pressure worldwide.
    But economic growth is picking up, with Gross Domestic Product rising by an annual rate of 3.1 percent in the first quarter, up from 2.9 percent in the previous quarter and above expectations of 2.8 percent growth.


    The Reserve Bank of Australia issued the following statement:
   

“At its meeting today, the Board decided to lower the cash rate by 25 basis points to 1.50 per cent, effective 3 August 2016.
The global economy is continuing to grow, at a lower than average pace. Several advanced economies have recorded improved conditions over the past year, but conditions have become more difficult for a number of emerging market economies. Actions by Chinese policymakers are supporting the near-term growth outlook, but the underlying pace of China’s growth appears to be moderating.
Commodity prices are above recent lows, but this follows very substantial declines over the past couple of years. Australia’s terms of trade remain much lower than they had been in recent years.
Financial markets have continued to function effectively. Funding costs for high-quality borrowers remain low and, globally, monetary policy remains remarkably accommodative.
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. Labour market indicators continue to be somewhat mixed, but are consistent with a modest pace of expansion in employment in the near term.
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.
Low interest rates have been supporting domestic demand and the lower exchange rate since 2013 is helping the traded sector. Financial institutions are in a position to lend for worthwhile purposes. These factors are all assisting the economy to make the necessary economic adjustments, though an appreciating exchange rate could complicate this.
Supervisory measures have strengthened lending standards in the housing market. Separately, a number of lenders are also taking a more cautious attitude to lending in certain segments. 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. Growth in lending for housing purposes has slowed a little this year. All this suggests that the likelihood of lower interest rates exacerbating risks in the housing market has diminished.
Taking all these considerations into account, 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.”
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