Reserve Bank cuts interest rates to historic low of 0.75% to boost weak economy
Australia's central bank has reduced the official cash rate by 0.25% to a new record low of 0.75%. This move was long-anticipated and follows several months of indications from Governor Philip Lowe that the Reserve Bank was ready to lower rates to increase employment and bring inflation back into the 2-3% target range. This rate cut by the RBA marks the third reduction in the cash rate in the past five months. Governor Lowe stated that it is "reasonable to expect that an extended period of low-interest rates will be required," suggesting that the RBA is prepared to ease monetary policy further. Australia's economy grew by 1.4% in the year to June, the lowest annual rate recorded since 2009, which Governor Lowe noted as "weaker than expected." With the unemployment rate rising from 5.0% at the start of the year to 5.3% in August and an inflation rate of 1.6%, experts anticipate rates to fall to at least 0.5% to further stimulate the economy, following two successive cuts in June and July. Governor Lowe mentioned that the economy had reached a "gentle turning point," with growth slightly higher in the first half of this year compared to the second half of 2018. He also highlighted factors such as the low level of interest rates, recent tax cuts, ongoing infrastructure spending, signs of stability in some housing markets, and a more positive outlook for the resources sector as potential supports for growth. Governor Lowe emphasized that the Australian economy "has spare capacity, and lower interest rates will help make inroads into that." While the Morrison government is reluctant to stimulate the economy through fiscal policy, Treasurer Josh Frydenberg referred to the government's existing infrastructure package and income tax cuts as measures that would contribute to future growth figures. Hundreds of thousands of Australian borrowers can now breathe a sigh of relief as the Reserve Bank of Australia (RBA) has chosen to maintain the nation's cash rate for the third consecutive month. During a meeting at the RBA's Martin Place headquarters this afternoon, the RBA board decided to leave interest rates unchanged at 4.1 per cent. Governor Lowe has also eliminated any mention of a "narrow" path to a gentle economic slowdown in which inflation eases without a significant rise in unemployment. In fact, the economy is already slowing to below-average levels, with the RBA predicting that growth will ease to 1.75% next year and average just above 2% in 2025. Meanwhile, the unemployment rate is expected to tick up to 4.5% late next year, which is mostly in line with previous estimates. The Commonwealth Bank of Australia, which had earlier anticipated a rate hike to 4.35%, now anticipates that the RBA will keep rates steady for an extended period this year. "While the RBA maintains a bias towards tightening, we believe the conditions for another rate hike are challenging. It would require unexpectedly positive economic data from this point onwards for the RBA to change its outlook," explained Belinda Allen, a senior economist at CBA. Nevertheless, there is a lingering risk that services inflation, including rising rents, could remain stubbornly high. So far, the job market has not conformed to expectations of a slowdown, and house prices continued to rise in July, creating a positive wealth effect for consumers. Both National Australia Bank and Goldman Sachs now anticipate a rate hike in November, which would bring the cash rate to 4.35%, in contrast to previous expectations of two rate hikes. Concluding its August policy meeting, the Reserve Bank of Australia (RBA) has, for the most part, maintained its economic outlook as consistent with the previous quarter. The RBA anticipates that headline inflation, presently at 6%, will gradually return to the desired range of 2-3% by late 2025.
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