By CentralBankNews.info
Australia’s central bank lowered its benchmark cash rate by 25 basis points to 1.25 percent, its first rate cut since August 2016, in a move widely expected following Governor Philip Lowe’s statement two weeks ago that a rate cut would likely be appropriate as inflation was likely to remain below the bank’s target.
The rate cut by the Reserve Bank of Australia (RBA) puts the cash rate at a new historic low and continues the steady, but consistent lowering of interest rates since November 2011 when the rate was cut from 4.75 percent.
“The board (of RBA) took this decision to support employment growth and provide greater confidence that inflation will be consistent with the medium-term target,” RBA said, adding a lower rate would help reduce spare capacity in the economy and lower unemployment.
The rate cut comes amid growing evidence of a slowing domestic economy, with retail sales in April posting a surprise drop of 0.1 percent from March while new home sales in April slumped 11.8 percent from March, the largest monthly decline since September 2005.
Although RBA said the outlook for the global economy remains “reasonable,” it added downside risks from trade disputes had risen and affecting investment decisions in a number of countries.
RBA confirmed it still expects Australia’s economy to expand around 2.75 percent this year and in 2020, supported by higher investment in infrastructure and a pick-up in activity in the resources sector and the outlook for household consumption, which is being affected by a decline in house prices and a long period of low income growth, remains uncertain.
The RBA board gave little direct guidance about its next policy decision, saying only it will continue to monitor the labour market and “adjust monetary policy to support sustainable growth in the economy and the achievement of the inflation target over time.”
In its May monetary policy statement the RBA lowered its forecast for growth this year and in 2020 to 2.75 percent from a previous 2019 forecast of 3.0 percent, as it became evident growth in 2018 of 2.3 percent was well below earlier forecasts of 2.75 percent.
Australia’s inflation rate fell to 1.3 percent in the first quarter of this year from 1.8 percent in the last quarter of 2018, well below RBA’s target of 2 – 3 percent.
In May RBA cut its 2019 inflation forecast to 2.0 percent from a previous 2.75 percent but maintained its 2020 forecast of 2.75 percent.
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 1.25 per cent. The Board took this decision to support employment growth and provide greater confidence that inflation will be consistent with the medium-term target.
The outlook for the global economy remains reasonable, although the downside risks stemming from the trade disputes have increased. Growth in international trade remains weak and the increased uncertainty is affecting investment intentions in a number of countries. In China, the authorities have taken steps to support the economy, while addressing risks in the financial system. In most advanced economies, inflation remains subdued, unemployment rates are low and wages growth has picked up.
Global financial conditions remain accommodative. Long-term bond yields and risk premiums are low. In Australia, long-term bond yields are at historically low levels. Bank funding costs have also declined further, with money-market spreads having fully reversed the increases that took place last year. The Australian dollar has depreciated a little over the past few months and is at the low end of its narrow range of recent times.
The central scenario remains for the Australian economy to grow by around 2¾ per cent in 2019 and 2020. This outlook is supported by increased investment in infrastructure and a pick-up in activity in the resources sector, partly in response to an increase in the prices of Australia’s exports. The main domestic uncertainty continues to be the outlook for household consumption, which is being affected by a protracted period of low income growth and declining housing prices. Some pick-up in growth in household disposable income is expected and this should support consumption.
Employment growth has been strong over the past year, labour force participation has been increasing, the vacancy rate remains high and there are reports of skills shortages in some areas. Despite these developments, there has been little further inroads into the spare capacity in the labour market of late. The unemployment rate had been steady at around 5 per cent for some months, but ticked up to 5.2 per cent in April. The strong employment growth over the past year or so has led to a pick-up in wages growth in the private sector, although overall wages growth remains low. A further gradual lift in wages growth is expected and this would be a welcome development. Taken together, these labour market outcomes suggest that the Australian economy can sustain a lower rate of unemployment.
The recent inflation outcomes have been lower than expected and suggest subdued inflationary pressures across much of the economy. Inflation is still however anticipated to pick up, and will be boosted in the June quarter by increases in petrol prices. The central scenario remains for underlying inflation to be 1¾ per cent this year, 2 per cent in 2020 and a little higher after that.
The adjustment in established housing markets is continuing, after the earlier large run-up in prices in some cities. Conditions remain soft, although in some markets the rate of price decline has slowed and auction clearance rates have increased. Growth in housing credit has also stabilised recently. Credit conditions have been tightened and the demand for credit by investors has been subdued for some time. Mortgage rates remain low and there is strong competition for borrowers of high credit quality.
Today’s decision to lower the cash rate will help make further inroads into the spare capacity in the economy. It will assist with faster progress in reducing unemployment and achieve more assured progress towards the inflation target. The Board will continue to monitor developments in the labour market closely and adjust monetary policy to support sustainable growth in the economy and the achievement of the inflation target over time.”
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