Australia’s central bank yesterday cut its benchmark interest rate to a record low 1.75 percent as it responded to a low outlook for inflation.
The Reserve Bank of Australia board decided to cut the cash rate by 0.25 percentage points from its previous low of 2 percent. The board last cut rates about one year ago.
The move came less than one week after the Australian Bureau of Statistics released figures showing inflation had turned negative in the first quarter, with prices contracting 0.2 percent when compared with the fourth quarter of last year. Annual inflation remained positive, at 1.3 percent.
“Inflation has been quite low for some time and recent data were unexpectedly low,” Bank of Australia Governor Glenn Stevens said in a statement. “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.”
Economists had been divided on whether the central bank would hold rates or cut them. The bank’s move prompted a fall in the Australian dollar of more than 1 percent against the US dollar.
Stevens said the nation’s terms-of-trade remained much lower than in recent years. He said that while commodity prices had firmed from recent lows, the improvement followed substantial declines over the past couple of years.
The bank’s announcement came just hours before Australian Treasurer Scott Morrison was due to release his first budget. Morrison indicated the budget would contain tax cuts for small and medium-sized businesses, designed to increase economic growth.
The center-right coalition government is hoping for a positive public response to the budget, with general elections expected to be held on July 2.
Australia managed to avoid a recession during the global financial crisis of 2008 thanks to a decade-long mining boom. However, with economic growth slowing in China, Australia’s largest export market, the prices for key commodities such as iron ore and coal have dropped.
Stevens said in his statement the economy is continuing to rebalance following the mining boom, adding that economic growth picked up in the second half of last year and the labor market had improved.
Economic growth is continuing this year, although probably at a more moderate pace, while recent labor market indicators have been mixed, he added.
Australia’s unemployment rate is 5.8 percent.
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