The Australian central bank cut its benchmark interest rate to a record low of 2 percent yesterday in a bid to jolt the nation’s economy, which is weighed by falling commodity prices and weakening demand from China.
The Reserve Bank of Australia’s 0.25 percent rate cut was the first in three months. Before the previous cut in February, the interest rate had been steady at 2.5 percent since August 2013.
Economists largely anticipated the move, although some thought the bank would hold off until after the Australian government releases its budget next week for the fiscal year beginning July 1.
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Reserve Bank of Australia Governor Glenn Stevens said in a statement that the global economy is expanding at a moderate pace, but commodity prices have declined over the past year, in some cases sharply.
“Looking ahead, the key drag on private demand is likely to be weakness in business capital expenditure in both the mining and non-mining sectors over the coming year,” Stevens said.
Public spending is also expected to be subdued.
The economy is therefore likely to be operating with a degree of spare capacity for some time yet.
The central bank forecast inflation to remain within the target range of between 2 percent and 3 percent over the next one to two years, even with a lower exchange rate.
“Low interest rates are acting to support borrowing and spending, and credit is recording moderate growth overall, with stronger lending to businesses of late,” Stevens said.
The Australian dollar has declined sharply against a rising US dollar over the past year, though less so against a basket of currencies.
“Further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices,” Stevens said.
The Australian dollar dipped on the bank’s announcement then quickly rebounded to US$0.788. The stock market briefly surged, then retreated.
Australian Treasurer Joe Hockey said interest rates remained relatively high compared with many other countries, which was putting upward pressure on the Australian dollar.
He said Stevens recognized green shoots in the Australian economy, including encouraging trends in household demand and jobs growth.
“This interest rate cut is going to help to facilitate those green shoots,” Hockey told reporters. “In fact, to carry on the metaphor, it’s as much about putting fertilizer on the green shoots as anything else.”
Hockey said the rate cut was “in sync” with his budget to be announced week, which is to include infrastructure spending and incentives for small business to borrow money to invest.
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