SYDNEY, May 7: Australia’s central bank cut its main cash rate to a record low of 2.75 percent on Tuesday and signalled there was room to ease further to support the economy, given low inflation and an historically high currency.
The Australian dollar fell half a U.S. Cent to $1.0180 as the quarter point cut surprised some analysts who had thought the Reserve Bank of Australia (RBA) would hold off for a while yet. Markets had seen a cut as an evens chance and were still pricing in one more easing in coming months.
‘The Board has previously noted that the inflation outlook would afford scope to ease further, should that be necessary to support demand,’ ‘ RBA Governor Glenn Stevens said. ‘At today’s meeting the Board decided to use some of that scope.’
Indeed, Stevens noted inflation had been lower than expected recently and well in line with the RBA’s long term target of 2 to 3 percent. The latest reading of underlying inflation put it at 2.4 percent in the year to March.
‘I think really what seems to have driven it is inflation trending lower than expected,’ said Su-Lin Ong, a senior economist at RBC Capital Markets.
‘There isn’t a lot in here to suggest that they would go again. But clearly when you’ve cut rates and you’ve got a bias to ease, the door is open.’
National Australia Bank responded speedily by cutting its standard variable mortgage rate by a full quarter point to 6.13 percent. The major banks have tended to only pass on a part of the official easing in the last few moves.
Stevens fingered the Australian dollar as one reason for the cut, saying it was historically high despite lower prices for many of the country’s major commodity exports.
Ever-more aggressive easing by major central banks has also put downward pressure on their currencies. The European Central Bank cut its rates just last week, while the Bank of Japan has embarked on a truly radical monetary expansion that sent the yen crashing.
Markets are still wagering on a further cut in large part because a long boom in mining investment is likely to crest this year and it remains uncertain whether areas outside of mining will prove strong enough to take up the slack.
Since the April meeting, the global outlook has grown more uncertain with data disappointing from Europe and China, Australia’s single largest export market.
(AGENCIES)
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