First Easing by Reserve Bank of Australia Since August 2013

February 3, 2015

After cutting Australia’s official cash rate to a record low of 2.25% from 2.5%, the RBA released a statement that justified the move on several counts.

  • “Growth is continuing at a below-trend pace, with domestic demand growth overall quite weak…The economy is likely to be operating with a degree of spare capacity for some time yet.”
  • The CPI recorded the lowest increase for several years in 2014…With growth in labour costs subdued, it appears likely that inflation will remain consistent with the target over the next one to two years, even with a lower exchange rate.”  Projected core inflation over the coming year was revised down to around 2.25%.
  • The Australian dollar “remains above most estimates of its fundamental value, particularly given the significant declines in key commodity prices. A lower exchange rate is likely to be needed to achieve balanced growth in the economy.”
  • “Taking into account the flow of recent information and updated forecasts, the Board judged that, on balance, a further reduction in the cash rate was appropriate.”

A substantial 225 basis points of reduction in the official cash rate was done in eight increments between November 2011 and August 2013.  Sufficient time has now passed to assess the impact of such on Australian growth and inflation.  In light of domestic economic prospects and the greater-than-expected disinflationary global developments over the past several months, which had compelled a number of other central banks to cut interest rates, Australian monetary officials felt it appropriate for them to ease policy further as well.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express  permission.



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