The Reserve Bank of Australia (RBA) cut the official cash rate by 25 basis points to a historic low of 1.5% at its board meeting today.
The central bank’s latest monetary policy decision – its second rate reduction this year – came after the nation last week reported the lowest annual rate of inflation in 17 years.
The Australian dollar fell by 0.5% to US75.1 cents immediately after the rate call, having traded at an intra-day high of US75.48 cents, and at US75.36 cents yesterday.
The market had priced in a 68% chance of a rate cut before today’s announcement, according to the Australian Securities Exchange (ASX) RBA Rate Indicator.
The RBA rate indicator calculates market expectations based on prices in the ASX 30-Day Interbank Cash Rate Futures.
Impact of low inflation
The RBA last cut the cash rate in May, when data showed inflation in the March quarter fell.
In his statement today, RBA governor Glenn Stevens said Australia’s overall economic growth “is continuing at a moderate pace” despite a substantial decline in business investment.
“Other areas of domestic demand, as well as exports, have been expanding at a pace at or above trend. Labour market indicators continue to be somewhat mixed, but are consistent with a modest pace of expansion in employment in the near term," he said.
“Recent data confirm that inflation remains quite low. Given very subdued growth in labour costs and very low cost pressures elsewhere in the world, this is expected to remain the case for some time.”
CommBank continues to expect another rate cut in November, which could bring the cash rate to 1.25%, given that inflation is likely to remain below the central bank’s 2%-3% target band, chief economist Michael Blythe wrote in a note yesterday.
Housing risk eases
Stevens pointed out that the latest data suggested dwelling prices have been increasing “only moderately” so far this year, with substantial supply of apartments coming on stream over the next two years.
“Growth in lending for housing purposes has slowed a little this year. All this suggests that the likelihood of lower interest rates exacerbating risks in the housing market has diminished,” he stated.
That comment suggested the RBA is less concerned that lower rates would boost home prices, argued Craig James, chief economist at CommSec.
"But there are no guarantees that lower rates will indeed boost economic growth and inflation. That doesn’t mean that you give up trying," he said.
"Central banks need to do everything in their power to stimulate growth and prevent super-low inflation rates being sustained. And certainly do everything to prevent deflation [falling prices] from taking hold."
James added that the RBA is unlikely to lower rates to near zero, as that would reduce interest income for retirees and profitability for some major ASX players, which could impact share prices and superannuation returns.
Stevens noted that while several developed economies have seen improvement over the past year, conditions have become “more difficult” for some emerging markets.
“Actions by Chinese policymakers are supporting the near-term growth outlook, but the underlying pace of China’s growth appears to be moderating," he said.
“Commodity prices are above recent lows, but this follows very substantial declines over the past couple of years. Australia’s terms of trade remain much lower than they had been in recent years.”
The RBA governor reiterated that low interest rates are necessary to support the nation’s economic transition to be less reliant on the mining sector, and that a rising Australian dollar could obscure these adjustments.
CommBank responded to the central bank's announcement with reductions to its standard variable rate home loans.