In the face of slowing economic growth, expectations are rising for central banks to take action by cutting interest rates. Today, Australia’s central bank made its first such move in almost three years.
On Tuesday, the Reserve Bank of Australia (RBA) lowered its benchmark interest rate by 25 basis points to 1.25%, a record low.
The change was widely expected after the central bank’s governor, Philip Lowe, said two weeks ago that inflation was likely to remain below the bank’s target range of 2% to 3% a year, and that a decrease in the cash rate would likely be appropriate.
“The board took this decision to support employment growth and provide greater confidence that inflation will be consistent with the medium-term target,” the bank said in a statement.
It said the outlook for the global economy “remains reasonable,” but that risks stemming from trade disputes are growing.
“Growth in international trade remains weak, and the increased uncertainty is affecting investment intentions in a number of countries,” it said.
In a report, Tuuli McCully, head of Asia-Pacific economics at Scotiabank, said the rate cut was justified, given, among other things, Australia’s persistently low inflation “on the back of lower fuel prices, muted housing-related price gains and soft wage gains.”
The RBA’s cash rate last moved in August 2016 when it was reduced by 0.25% to 1.5%. The rate hasn’t been increased since November 2010 when it rose 0.25% to 4.75%.
Treasurer Josh Frydenberg met with chief executives of Australia’s major banks in recent days to urge them to pass on the full value of any rate cut to borrowers.
“I expect all banks to pass on the benefits of sustained reductions in funding costs,” Frydeneberg told The Sydney Morning Herald newspaper.
The reduction is expected to boost Australia’s flagging housing market, increase exports by reducing the value of the Australian currency and create jobs.
Lowe said in a speech two weeks ago that Australia had to “do better” than the current jobless rate of 5.2%, which had increased from 4.9%.
The Australian economy is suffering from the end of a mining boom, largely to supply China, that carried the country through the global economic crisis without a recession. The country has not suffered a recession—defined as two consecutive quarters of economic contraction—since the June quarter of 1991.
Yet, McCully said in his report that today’s rate cut is largely symbolic, given that looser monetary policy conditions will mostly be limited to boosting confidence.
“The policy action’s transmission to the real economy is set to be fairly small on the back of already low interest rates in the economy, high household debt, and the ongoing residential housing price correction,” he said. “There are growing calls on policy-makers to deploy additional stimulative measures to revive Australia’s economy.”
McCully also said that the RBA stands ready to ease further if needed, with labour market developments a key factor.
If labour markets don’t strengthen materially in the coming months, McCully said he expects another cut of 25 basis points to “follow sooner rather than later, most likely in the second half of 2019.”