Australia’s central bank cuts key rate to 2.5 percent

Australia’s central bank cuts key rate to 2.5 percent, matching RBNZ

By Jonathan Underhill

Aug 6 (BusinessDesk) – The Reserve Bank of Australia cut its cash rate by a quarter point to 2.5 percent as expected, matching its New Zealand counterpart’s official cash rate for the first time in more than four years and lifting the relative appeal of the kiwi.

The RBA made good on its observation in recent statements that inflation in Australia is benign enough to allow it to stimulate an economy that is growing below trend.

“The board has previously noted that the inflation outlook could provide some scope to ease policy further, should that be required to support demand,” Governor Glenn Stevens said in a statement. “At today's meeting, and taking account of recent information on prices and activity, the board judged that a further decline in the cash rate was appropriate.”

“The inflation outlook, as currently assessed, may provide some scope for further easing, should that be required to support demand,” he said.

The wording of the RBA’s latest statement is broadly unchanged from previous announcements. The economy “has been growing a bit below trend over the past year,” Stevens said. “This is expected to continue in the near term as the economy adjusts to lower levels of mining investment.”

Australia’s economy grew 0.6 percent in the first quarter, for an annual rate of 2.5 percent, missing economists' estimates of 0.8 percent and 2.7 percent respectively. Inflation was 0.6 percent on average in the second quarter, just above a Reuters forecast of 0.5 percent.

Stevens said recent data is “consistent with global growth running a bit below average this year, with reasonable prospects of a pick-up next year.”

The Australian dollar climbed to 89.53 US cents from 89.25 cents immediately before the announcement. The kiwi dollar dipped to 87.43 Australian cents from 87.71 cents. Some traders had been betting on the half-point cut by the RBA.

Stevens reiterated his view that the Australian dollar may fall.

“The Australian dollar has depreciated by around 10 percent since early April, although it remains at a high level,” he said today. “It is possible that the exchange rate will depreciate further over time, which would help to foster a rebalancing of growth in the economy.”

RBNZ governor Graeme Wheeler has said the OCR will need to rise in 2014.

(BusinessDesk)

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