The Reserve Bank of Australia (RBA) announced today a 25bps cut to interest rates from 3% to 2.75%. This puts the current rate to the lowest it has been so far since the RBA began setting monetary policy.
While analysts were divided on whether or not there would be a 25bps cut this May, they continue to foresee another 25bps cut later in the year. This would put the interest rate at 2.5%.
Increased Unemployment, Low Inflation
In his statement, RBA Governor Glenn Stevens pointed out that growth in the country has somewhat slowed down during the second half of 2012, a trend that has continued up to the present. Aside from that, the unemployment has also increased a little, “though it remains relatively low.”
Meanwhile, inflation was “a little lower than” expected. Some analysts point this out as the main reason why the Reserve Bank found it fit to cut rates further.
Stevens said in his statement that, “the Board has previously noted that the inflation outlook would afford scope to ease further, should that be necessary to support demand. At today's meeting the Board decided to use some of that scope. It judged that a further decline in the cash rate was appropriate to encourage sustainable growth in the economy, consistent with achieving the inflation target.”
While the previous rate cuts have begun to have a positive impact on the economy, this was not the case on the Australian Dollar. “The exchange rate… has been little changed at a historically high level over the past 18 months, which is unusual given the decline in export prices and interest rates during that time.”
The announcement has somewhat created an immediate effect, as the Australian and US Dollar pair fell from 1.025 to around 1.018 after the announcement.