RESERVE BANK OF AUSTRALIA CUTS THE CASH RATE TO 0.75% – WHY?
By Paul Nicol
On 1st October, the Reserve Bank of Australia made its third reduction in the cash rate in five months, reducing the benchmark borrowing rate in Australia to yet another record low of 0.75%. The expected move follows months of signals from Governor Philip Lowe that the Reserve Bank was prepared to push rates lower to increase employment and lift stubbornly low inflation back into the 2-3% target band.
In its monthly monetary policy statement, Governor Lowe explained that although the “outlook for the global economy remains reasonable, the risks are tilted to the downside”, with the current US-China trade dispute affecting global trade and businesses scaling back their investment.
Recently, World Trade Organisation (WTO) more than halved its projection for growth in global trade this year, from the 2.6% growth it forecast in April to 1.2%, citing the trade conflict for the slumping growth rate. If the WTO’s projected growth of 1.2 % were realised, it would be the weakest year for global trade since 2009. In many ways, the RBA is being seen as taking the likely course of Central banks around the world by lowering rates to respond to persistent downside risks in the global economy.
Domestically, Australia’s economy grew by 1.4% in the year to June – the lowest recorded annual rate since 2009, which Lowe noted was “weaker than expected”. Lowe went on to explain that the reduction in interest rates, recent tax cuts, ongoing spending on infrastructure, signs of stabilisation in the established housing markets and a brighter outlook for the resource sector should all support growth.
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%, it is highly likely interest rates will fall further and that an extended period of low interest rates will be required for the RBA to achieve its inflation target and to stimulate growth.
In a bright spot of otherwise gloomy news of recent, over the weekend President Donald Trump said Washington would suspend a tariff hike planned for Tuesday on $US250 billion ($370 billion) of Chinese goods. In exchange, Mr Trump said China had agreed to buy as much as $US50 billion of American farm goods. Details of other possible agreements were not released. Mr Trump said there was more to negotiate, but he hoped the deal could be concluded when world leaders meet for the APEC meeting in mid-November.
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