Reserve Bank of Australia’s Official Cash Rate Reduced to 1.75%

May 3, 2016

The 25-basis point OCR reduction was not anticipated but likewise is not shocking juxtaposed against such recent data reports as these:

  1. Consumer prices had been expected to rise 0.2% last quarter but instead fell 0.2%, resulting in a 0.4 percentage point drop in the year-on-year pace to 1.3%.
  2. Core CPI inflation decelerated by 0.4-0.5 percentage points last quarter and was discernibly below the medium-term target.
  3. Producer prices also dropped 0.2% in the first quarter, cutting on-year PPI inflation to 1.2% from 1.9%.
  4. National Australia Bank’s indices of business conditions and confidence each fell in April.
  5. The Australian manufacturing purchasing managers index dropped 4.7 points to 53.4 in April.

A statement justifying today’s move concluded that “prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting.  Monetary policy has been accommodative for quite some time. Low interest rates have been supporting demand and the lower exchange rate overall has helped the traded sector. Credit growth to households continues at a moderate pace, while that to businesses has picked up over the past year or so. These factors are all assisting the economy to make the necessary economic adjustments, though an appreciating exchange rate could complicate this.”  It’s fair to assume that reversing the Aussie dollar’s recent gains were a motivating factor, if not the main near-term effect sought from today’s surprise announcement.  The statement also asserts that “the potential risks to the housing market of lower interest rates are less than they were a year ago.”

It had been a year since the previous interest rate cut, also of 25 basis points.  There had been one other reduction last year in February, 50 basis points of ease in 2013, 125 bps of cuts in 2012 and 50 bps of ease in 2011 from a prior peak of 4.75%. 

Australia reports CPI and PPI data on a quarterly basis and presumably would want to see 2Q results before changing policy again.  A quarterly Statement on Monetary Policy due Friday may clarify this point.  Off the record, one has to think that future changes in the Aussie dollar will continue to exert substantial influence of monetary policy.

Copyright 2016, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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