RBA makes surprise 25bp rate cut to 2.75pc on weaker data

The Reserve Bank of Australia caved into pressure to cut interest rates, spooked by rising unemployment and weak inflation underpinned by a stubbornly high Australian dollar.

The official cash rate fell to 2.75 per cent today, down from 3 per cent, marking out a record low for Australia’s official interest rate, which the RBA cut four times last year to jump start the nation’s lacklustre non-mining economy and deflate the supercharged dollar.The Aussie fell more than half a US cent to $US1.0184 immediately following the rates announcement, while the ASX200 reversed its decline, jumping 18 points  or 0.1 per cent, to 5174 points.

Governor Glenn Stevens cited weak credit demand and a still unusually strong Australian dollar in justifying the decision, adding that the inflation outlook remained tame.

In a statement accompanying the decision, Mr Stevens said the central bank had previously noted that the muted inflation outlook would afford it scope to ease monetary policy further if necessary to support demand.

RBA statement on monetary policy

“The board decided to use some of that scope,” Mr Stevens said. “It judged that a further decline in the cash rate was appropriate to encourage sustainable growth in the economy, consistent with achieving the inflation target.”

Mr Stevens said that the nation’s growth last year was close to trend but a bit below trend in the second half and that that situation appeared to have continued into this year.

“Employment has continued to grow but more slowly than the labour force, so that the rate of unemployment has increased a little, though it remains relatively low,” he said.

He said that there had been a strengthening in consumption and a modest firming in dwelling investment, while there were prospects for some increase in business investment outside the resources sector over the coming year.

Inflation is consistent with the central bank’s target of 2 to 3 per cent over the economic cycle and, if anything, a little lower than expected, Mr Stevens said.

The effects of previous rate cuts were still emerging, he added.

“The exchange rate … has been little changed at a historically high level over the past 18 months, which is unusual given the decline in export prices and interest rates,” he said.

The market had put the likelihood of a rate cut at 50 per cent following a dreary batch of economic data in recent weeks, including rising  unemployment, lacklustre building approvals and weak March retail sales.

Most economists, however, had expected the Reserve Bank to wait until June or later to cut rates.

For months now, the Reserve Bank has maintained that it stood ready to  cut interest rates “to support demand should that be necessary” but has previously  argued that its previous cuts were having the desired effect, noting the  lagged impact of monetary policy.

The government has called on Australia’s major banks to pass any rate cut on in full to mortgage holders, who have been enjoying the lowest mortgage rates since 1996, except for a brief period in 2009, thanks to 1.75 percentage points of official rate cuts since late 2011.

On a $300,000 mortgage, repayments will fall by $46 a month on average if banks pass on the full rate reduction.


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