SYDNEY: Australia’s central bank cut interest rates by 25 basis points to a historic low of 1.75 percent on Tuesday, with the move triggered by lower-than-expected inflation, sending the currency lower.
The Reserve Bank of Australia (RBA) had remained on hold for the past year, having already lowered borrowing costs in an effort to spur growth as the economy exits an unprecedented mining boom.
Governor Glenn Stevens said the board now considered another cut appropriate following “information showing inflationary pressures are lower than expected.”
“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,” he added.
The Australian dollar fell more than one percent on the news, dropping to 75.84 US cents.
“The RBA’s decision to cut rates will keep a lid on further appreciation in the Australian dollar, and increases the likelihood that we have seen a peak for the currency,” ANZ Research said in a note.
ANZ added that “the bank is likely to follow up with another rate cut in the near term.”
Inflationary data released late last month showed that Australian consumer prices fell in January-March for the first time since 2008 during the global financial crisis.
For the year to March, inflation came in at just 1.3 percent, well down from the 1.7 percent hike over the year to December.
The RBA, which targets an underlying rate of 2.0 percent to 3.0 percent, said Tuesday that the economy appeared to be rebalancing following the mining investment boom.
“GDP growth picked up over 2015, particularly in the second half of the year, and the labor market improved,” Stevens said.
“Indications are that growth is continuing in 2016, though probably at a more moderate pace.”
Australia, which has successfully avoided falling into recession for almost 25 years, posted a better-than-expected GDP reading of 3.0 percent last year, while the jobless rate slipped to 5.7 percent in March — the lowest in two-and-a-half years.
But Australia’s economy still faces an uncertain period ahead as growth slows in its largest trading partner China and Stevens noted uncertainty about the global economic outlook.
He said inflation had been quite low for some time but recent data were “unexpectedly low”.
“While the quarterly data contain some temporary factors, 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,” Stevens said.
The bank’s decision came just hours before Treasurer Scott Morrison delivers his annual budget, which will attempt to stimulate jobs and growth and boost the conservative government ahead of an election expected on July 2.