Australia slashes rate to record low

Australia’s central bank dropped interest rates to a new record low after a recent run of soft inflation readings, with some economists forecasting further cuts ahead.
The 25 basis point cut to 1.5 percent means the Reserve Bank of Australia (RBA) has slashed rates by 300 basis points since November 2011 to support the economy as it transitions toward non-resources growth after a mining investment boom.
“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,” Glenn Stevens, bank governor, said in a statement.
The decision follows official figures last month showing that consumer prices fell to a 17-year annual low of 1.0 percent in April-June, well off the RBA’s inflation target of 2.0-3.0 percent.
Treasurer Scott Morrison denied that the cut was a sign of a struggling economy, saying that Australia was posting 3.1 percent growth, while Stevens said it was unlikely to overheat the housing market.
The majority of economists had forecast that the RBA, an inflation-targeting central bank, would cut interest rates, with 20 out of 25 surveyed by Bloomberg News predicting the move.
The Australian dollar fell 0.4 percent to 75.09 US cents at 2.33pm in Sydney (0430 GMT), according to Bloomberg.
Commenting on the global economy, Stevens noted that the underlying pace of growth in Australia’s largest trading partner China “appears to be moderating.”
Australia has been growing more strongly than most of the world’s advanced economies but like most countries is struggling to kickstart inflation, with oil prices subdued and global trade tepid.
Wages growth has also remained soft, while “labor market indicators continue to be somewhat mixed but are consistent with a modest pace of expansion in employment in the near term,” Stevens said.
“It’s not that they’ve got a newly bearish view of the economy or that inflation was materially different from their expectations, it was more that they cut rates back in May and felt that they had room to do it further this month,” National Australia Bank senior economist David de Garis told AFP.
The rate cut is expected to take some time to feed through to possibly pushing up consumer prices, with the RBA’s own forecasts in May expecting inflation to only lift toward the target band in late 2017 or in 2018.
“We think that (low inflation) is going to persist for a while and we think that, on balance, the next few inflation prints are going to drive the RBA into more action, most likely in the first-half of next year,” JP Morgan senior economist Ben Jarman told AFP.
Leading Australian economist, Bill Evans of Westpac Bank, said the RBA was expected to sit on the sidelines and observe the next few growth and inflation readings before acting again, with uncertainty about the global economic environment also a key factor.
“For us the real issue will be the environment in 2017 when the housing cycle will be in reverse; jobs growth may have cooled; global growth, particularly in this region, will have slowed further; and Australia’s interest rates may still be attractive to international investors,” Evans said in a note.

Source: Arab News