Australia’s central bank lowered its benchmark cash rate by another 25 basis points to a new historic low of 0.75 percent and said it “is prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement the inflation target over time.”
The Reserve Bank of Australia (RBA) said its decision to lower interest rates further was aimed at supporting employment and income growth and provide greater confidence that inflation will be consistent with its medium-term target as the economy still has spare capacity and lower interest rates will help make inroads into that.
“The Board also took account of the forces leading to the trend to lower interest rates globally and the effect this trend is having on the Australian economy and inflation outcomes,” RBA said.
RBA has now cut its rate three times this year by a total of 75 basis points following cuts in June and July and confirmed it expects to keep interest rats low for an extended period of time to reach full employment and achieve its inflation target. Inflation in Australia has been stable but below RBA’s 2.0 to 3.0 percent percent target for most of this year and fell to 1.6 percent in the second quarter of this year from a 2-1/2 year low of 1.3 percent in the first quarter.
As inflation pressures remain subdued, RBA expects inflation to be a little under 2 percent over 2020 and a little over 2 percent over 2021.
“While the outlook for the global economy remains reasonable, the risks are tilted to the downside,” RBA said, pointing to the impact of the U.S-China trade dispute and other technology disputes, i.e. Japan and South Korea’s dispute, on trade flows and investment, which is leading to scaled-back investments due to increased uncertainty.
Although Australia’s economy grew by a weaker-than-expected 1.4 percent in the second quarter, continuing the downwards trend in the last four quarters, RBA Governor Philip Lowe said a turning point appears to have been reached and lower interest rates, recent tax cuts, infrastructure spending, signs of a more stable housing market and a brighter outlook for the resources sector should support economic growth.
The Australian dollar, known as the Aussie, has been depreciating since January 2018 and was trading at 1.48 to the U.S. dollar today, down 4 percent this year and down 13.5 percent since the start of 2018.
The Reserve Bank of Australia issued the following statement by its governor, Philip Lowe:
“At its meeting today, the Board decided to lower the cash rate by 25 basis points to 0.75 per cent.
While the outlook for the global economy remains reasonable, the risks are tilted to the downside. The US–China trade and technology disputes are affecting international trade flows and investment as businesses scale back spending plans because of the increased uncertainty. At the same time, in most advanced economies, unemployment rates are low and wages growth has picked up, although inflation remains low. In China, the authorities have taken further steps to support the economy, while continuing to address risks in the financial system.
Interest rates are very low around the world and further monetary easing is widely expected, as central banks respond to the persistent downside risks to the global economy and subdued inflation. Long-term government bond yields are around record lows in many countries, including Australia. Borrowing rates for both businesses and households are also at historically low levels. The Australian dollar is at its lowest level of recent times.
The Australian economy expanded by 1.4 per cent over the year to the June quarter, which was a weaker-than-expected outcome. A gentle turning point, however, appears to have been reached with economic growth a little higher over the first half of this year than over the second half of 2018. The low level of interest rates, recent tax cuts, ongoing spending on infrastructure, signs of stabilisation in some established housing markets and a brighter outlook for the resources sector should all support growth. The main domestic uncertainty continues to be the outlook for consumption, with the sustained period of only modest increases in household disposable income continuing to weigh on consumer spending.
Employment has continued to grow strongly and labour force participation is at a record high. The unemployment rate has, however, remained steady at around 5¼ per cent over recent months. Forward-looking indicators of labour demand indicate that employment growth is likely to slow from its recent fast rate. Wages growth remains subdued and there is little upward pressure at present, with increased labour demand being met by more supply. Caps on wages growth are also affecting public-sector pay outcomes across the country. A further gradual lift in wages growth would be a welcome development. Taken together, recent outcomes suggest that the Australian economy can sustain lower rates of unemployment and underemployment.
Inflation pressures remain subdued and this is likely to be the case for some time yet. In both headline and underlying terms, inflation is expected to be a little under 2 per cent over 2020 and a little above 2 per cent over 2021.
There are further signs of a turnaround in established housing markets, especially in Sydney and Melbourne. In contrast, new dwelling activity has weakened and growth in housing credit remains low. Demand for credit by investors is subdued and credit conditions, especially for small and medium-sized businesses, remain tight. Mortgage rates are at record lows and there is strong competition for borrowers of high credit quality.
The Board took the decision to lower interest rates further today to support employment and income growth and to provide greater confidence that inflation will be consistent with the medium-term target. The economy still has spare capacity and lower interest rates will help make inroads into that. The Board also took account of the forces leading to the trend to lower interest rates globally and the effects this trend is having on the Australian economy and inflation outcomes.
It is reasonable to expect that an extended period of low interest rates will be required in Australia to reach full employment and achieve the inflation target. The Board will continue to monitor developments, including in the labour market, and is prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time.”
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