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Category: Economic Trends / Money and Monetary Policy / Budget

RBA cuts interest rates to historic low of 1.75pc

Tuesday, 3 May 2016 12:30:24 | Stephen Letts

Unexpected deflation has fuelled expectations the RBA will make the move. (AAP: Joel Carrett)

The Reserve Bank of Australia has moved to head off fears about deflation, cutting its official cash rate by 25 basis points to a historic low of 1.75 per cent.

It is the first change in interest rates since May last year, when rates were cut 25 basis points to 2 per cent.

Before the decision, the market had priced in roughly a 50 per cent chance of a cut after last week's surprisingly weak inflation figures.

Key to the decision was the reading of core inflation — the RBA's preferred measure — at 1.5 per cent, the lowest reading on record and well below the target band of 2 to 3 per cent.

If the 25 basis point cut was fully passed on to home loans by the banks, it would equate to a $43-a-month saving on a typical 25-year $300,000 mortgage.

The Australian dollar immediately tumbled 1 per cent to below 76 cents against the US dollar in response to the cut.

In a statement accompanying the decision, RBA governor Glenn Stevens pointed to the unexpectedly weak inflation data as the reason behind the move.

"While the quarterly data contain some temporary factors, these results, together with ongoing, very subdued growth in labour costs and very low cost pressures elsewhere in the world, point to a lower outlook for inflation than previously forecast," Mr Stevens said.

Mr Stevens said the board took into account developments in the housing market and the impact a tougher regulatory stance was having on keeping a lid on prices.

"At present, the potential risks of lower interest rates in this area are less than they were a year ago," he said.

The RBA also noted that while the global economy continued to grow, the growth was at a slower pace than expected and forecasts had been revised down further.

"Sentiment in financial markets has improved, after a period of heightened volatility early in the year," Mr Stevens said.

"However, uncertainty about the global economic outlook and policy settings among the major jurisdictions continues.

"Funding costs for high-quality borrowers remain very low and, globally, monetary policy remains remarkably accommodative.

"Taking all these considerations into account, the board judged that prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting."

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