Australia’s central bank cut interest rates to a fresh record low as it moves to counter the emergence of disinflation that’s swept the developed world and limit currency gains that could complicate an economic transition.
Reserve Bank of Australia Governor Glenn Stevens and his board lowered the cash rate by 25 basis points to 1.75 percent Tuesday, as predicted by 12 of 27 economists surveyed. Data last week showed quarterly deflation in the consumer price index and the weakest annual gain on record for core inflation -- which the RBA aims to keep between 2 percent and 3 percent on average.
“Inflation has been quite low for some time and recent data were unexpectedly low,” Stevens said in his statement. “These results, together with ongoing very subdued growth in labor costs and very low cost pressures elsewhere in the world, point to a lower outlook for inflation than previously forecast.”
The currency has risen as much as 15 percent since mid-January and is likely to further restrain import prices in Australia. The resurgent Aussie also casts doubt on the sustainability of both the Australian labor market’s improvement and the burgeoning tourism and education industries that led a 1 percentage point of gross domestic product turnaround in services exports.
Aussie Plunges
The Australian dollar fell after the decision, trading at 75.66 U.S. cents as of 3 p.m. in Sydney, from as high as 77.19 cents earlier in the day.
The RBA has also been monitoring the impact of tighter regulations on home loans as residential prices in Sydney and Melbourne surged on easy policy.
“In reaching today’s decision, the board took careful note of developments in the housing market, where indications are that the effects of supervisory measures are strengthening lending standards and that price pressures have tended to abate,” Stevens said. “At present, the potential risks of lower interest rates in this area are less than they were a year ago.”
Global policy is diverging and creating cross-currents as Europe and Japan move to negative rates and the U.S. tightens policy. That, together with a resurgent price for Australia’s biggest export, iron ore, has helped lift the Aussie dollar.
Global policy is diverging and creating cross-currents as Europe and Japan move to negative rates and the U.S. tightens policy. That, together with a resurgent price for Australia’s biggest export, iron ore, has helped lift the Aussie dollar.
Iron Ore Rebound
The RBA reiterated that “an appreciating exchange rate could complicate” the economy’s transition. It also noted the rebound in the iron ore price in response to policy easing in China, Australia’s biggest trading partner.
“Commodity prices have firmed noticeably from recent lows, but this follows very substantial declines over the past couple of years,” Stevens said. “Australia’s terms of trade remain much lower than they had been in recent years.”
He also noted that China’s growth rate “moderated further” in the first part of the year.
Stevens was upbeat on Australia’s growth after the economy expanded 3 percent last year. “Indications are that growth is continuing in 2016, though probably at a more moderate pace,” he said. “Labor market indicators have been more mixed of late.”
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