Australia readies for landmark interest rate cut

  • Business
  • Tuesday, 04 Jun 2019

A pedestrian walks past the Reserve Bank of Australia (RBA) headquarters in the central business district of Sydney, Australia, on Wednesday, May 15, 2019. Australia's economy has been weighed down by a retrenchment in household spending as property prices slump and slash personal wealth. An election Saturday is likely to see the opposition Labor party win power and lift spending further. Photographer: David Gray/Bloomberg

Sydney: Australia’s central bank is expected to slash interest rates to historic lows today, the first cut in three years amid global trade concerns and an underperforming domestic economy.

Australia’s resource-rich economy dodged the worst of the global financial crisis, but rising unemployment, low wages and below-target inflation are stoking fears about the health of the economy Down Under.

Analysts and investors are almost unanimous in their view that the Reserve Bank of Australia will cut rates by 25 basis points to 1.25% when it holds its monthly policy meeting.

“Neither we nor the market think the bank will stop there,” ANZ analysts told clients Monday.

“Market pricing has the cash rate falling below 1% before the end of this year.”

In the 10 years since the global meltdown, the Reserve Bank of Australia has – apart from a brief burst of optimism in 2010 – steadily cut rates from a peak of 7.25%.

Any hope of returning rates to more “normal” pre-crisis levels have been quashed by the slow global recovery and domestic headwinds.

A downturn in the country’s hypercharged housing market, falling consumption and stalled wages have already pushed Australia into a per capita recession, with the output per person falling for two consecutive quarters.

The decision to cut rates will take the central bank further into uncharted territory.

Governor Philip Lowe has himself warned that “low-for-long” interest rates could pose problems for financial stability, with banks and other firms overvaluing risky assets.

Already there is talk about the bank going a step further in improving liquidity by buying up securities – so-called quantitative easing.

“Without doubt, the option of QE would be on the radar screen for the RBA,” said Westpac chief economist Bill Evans, who said the bank would look at rates first. — Reuters

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