Australia cuts key rate to record low, ending nearthree-year pause

SYDNEY: Australia cut interest rates for the first time in almost three years to guard against a darkening global backdrop and attempt to drive increased hiring and faster inflation.

Reserve Bank of Australia (RBA) governor Philip Lowe made his first adjustment to the cash rate since taking the helm in September 2016, cutting by a quarter-point to 1.25% yesterday as expected by money markets and economists. They also see the central bank following up with another cut within three months.

“Today’s decision to lower the cash rate will help make further inroads into the spare capacity in the economy,” Lowe said in his post-meeting statement. “It will assist with faster progress in reducing unemployment and achieve more assured progress towards the inflation target.” The governor didn’t provide any new forward guidance.

Lowe’s cut comes against the backdrop of an intensifying trade dispute between the world’s economic superpowers and signs of weakness emerging in Australia’s previously roaring jobs market. The country’s economy slowed in recent quarters as tumbling property prices – led by a 15% fall in Sydney – left households feeling poorer and weighed on consumer spending.

The RBA’s easing comes as pressure mounts on the US Federal Reserve to reverse some of its tightening last year to prop up inflation and counter risks from rising protectionism. St Louis Fed chief James Bullard said on Monday that “a downward policy rate adjustment may be warranted soon,” the first time a Fed official has publicly suggested the need for a cut since the central bank held rates in January.

In his statement, Lowe noted some improvement in the housing market, with the rate of price declines slowing and housing credit stabilising. An easing of lending rules last month combined with the well-flagged prospect of rate cuts may have encouraged buyers.

Along with a boost of confidence from Prime Minister Scott Morrison’s centre-right government’s surprise re-election last month – on a platform of tax cuts – the short-term prospects appear a bit brighter.

But structural problems remain. Data out today is likely to show GDP rose an annual 1.8% in the first three months of this year, almost a percentage point below the economy’s speed limit. The central bank needs growth of more than 2.75% in order to soak up spare capacity and drive down unemployment.

“There has been little further inroads into the spare capacity in the labour market of late,” Lowe said. Unemployment climbed to 5.2% in April after having held around 5% for several months before that. — Bloomberg

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