Australian central bank cuts key rate to record low amid slower global growth

06, Jun. 2019

SYDNEY, NNA - The Reserve Bank of Australia on Tuesday lowered the official cash rate by 25 basis points to a record low of 1.25 percent, as expected, easing policy for the first time in nearly three years amid slower global demand and domestic inflation.

Key points:

―― The rationale for the RBA’s first rate cut since August 2016 is to “support employment growth and provide greater confidence that inflation will be consistent with the medium-term target” in a range of 2 percent to 3 percent, the bank said in a statement. Australian inflation has slowed to just above 1 percent from around 2 percent last year.

―― The main scenario remains for the Australian economy to grow around 2.75 percent in 2019 and 2020, “supported by increased investment in infrastructure and a pick-up in activity in the resources sector, partly in response to an increase in the prices of Australia's exports,” according to the statement.

―― The key domestic uncertainty continues to be the outlook for household consumption, which has been dampened by protracted low-income growth and declining housing prices.

―― Inflation is subdued. The standard scenario remains for underlying inflation to be 1.75 percent this year, 2 percent in 2020 and accelerating slightly after that.

―― Major lenders NAB and Commonwealth Bank announced Tuesday each would pass on the full 0.25 percentage point rate cut to customers, while rivals ANZ and Westpac said they would lower interest rates on mortgages by only 0.18 percentage points and 0.20 percentage points, respectively.

Takeaway:

―― Market participants expect further RBA easing. The bank said it “would continue to monitor developments in the labour market closely and adjust monetary policy to support sustainable growth” in the economy and the achievement of the inflation target over time. The bank sees downside risks from the U.S.-China trade row.

―― Both JP Morgan and AMP Capital predict further easing by the RBA totaling 50 basis points by the middle of next year.

―― Other major central banks may opt to ease amid global uncertainty. Federal Reserve Chairman Jerome Powell said Tuesday FOMC members “are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2 percent objective.”