Reserve Bank of Australia takes its official interest rate down to 1.25%, below Australia's inflation rate of 1.3%, in an attempt to get that inflation rate up

Reserve Bank of Australia takes its official interest rate down to 1.25%, below Australia's inflation rate of 1.3%, in an attempt to get that inflation rate up

This is the statement released by the Reserve Bank of Australia announcing a 25 basis points cut to its official interest rate.


At its meeting today, the Board decided to lower the cash rate by 25 basis points to 1.25 per cent. The Board took this decision to support employment growth and provide greater confidence that inflation will be consistent with the medium-term target.

The outlook for the global economy remains reasonable, although the downside risks stemming from the trade disputes have increased. Growth in international trade remains weak and the increased uncertainty is affecting investment intentions in a number of countries. In China, the authorities have taken steps to support the economy, while addressing risks in the financial system. In most advanced economies, inflation remains subdued, unemployment rates are low and wages growth has picked up.

Global financial conditions remain accommodative. Long-term bond yields and risk premiums are low. In Australia, long-term bond yields are at historically low levels. Bank funding costs have also declined further, with money-market spreads having fully reversed the increases that took place last year. The Australian dollar has depreciated a little over the past few months and is at the low end of its narrow range of recent times.

The central scenario remains for the Australian economy to grow by around 2¾ per cent in 2019 and 2020. This outlook is supported by increased investment in infrastructure and a pick-up in activity in the resources sector, partly in response to an increase in the prices of Australia's exports. The main domestic uncertainty continues to be the outlook for household consumption, which is being affected by a protracted period of low income growth and declining housing prices. Some pick-up in growth in household disposable income is expected and this should support consumption.

Employment growth has been strong over the past year, labour force participation has been increasing, the vacancy rate remains high and there are reports of skills shortages in some areas. Despite these developments, there has been little further inroads into the spare capacity in the labour market of late. The unemployment rate had been steady at around 5 per cent for some months, but ticked up to 5.2 per cent in April. The strong employment growth over the past year or so has led to a pick-up in wages growth in the private sector, although overall wages growth remains low. A further gradual lift in wages growth is expected and this would be a welcome development. Taken together, these labour market outcomes suggest that the Australian economy can sustain a lower rate of unemployment.

The recent inflation outcomes have been lower than expected and suggest subdued inflationary pressures across much of the economy. Inflation is still however anticipated to pick up, and will be boosted in the June quarter by increases in petrol prices. The central scenario remains for underlying inflation to be 1¾ per cent this year, 2 per cent in 2020 and a little higher after that.

The adjustment in established housing markets is continuing, after the earlier large run-up in prices in some cities. Conditions remain soft, although in some markets the rate of price decline has slowed and auction clearance rates have increased. Growth in housing credit has also stabilised recently. Credit conditions have been tightened and the demand for credit by investors has been subdued for some time. Mortgage rates remain low and there is strong competition for borrowers of high credit quality.

Today's decision to lower the cash rate will help make further inroads into the spare capacity in the economy. It will assist with faster progress in reducing unemployment and achieve more assured progress towards the inflation target. The Board will continue to monitor developments in the labour market closely and adjust monetary policy to support sustainable growth in the economy and the achievement of the inflation target over time.

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ANZ (A) hold onto 7bps

RBNZ might be next !

Indeed Chairman Moa,

And there may be implications for NZ’s housing market.......

TTP

Yeah the straw that broke the camels back

Australia better hope employment stays steady. High wages are definitely Australia's saving grace for now.

Aussie, Aussie, Aussie!!! Oi, OI, OI!!!!

Go the Aussie Ponzi, GO!

RBA caught bowling a sandpapered under-arm ball... but at least they’re cheating their own this time!

“The outlook for the global economy remains reasonable”
Does it? Does it really?? The slow corrosion of our global systems marches on and we call the outlook reasonable.

Slumlords must be rejoicing in Aus. First the Libs win, now a cut to the OCR!

Today's decision to lower the cash rate will help make further inroads into the spare capacity in the economy. It will assist with faster progress in reducing unemployment and achieve more assured progress towards the inflation target. The Board will continue to monitor developments in the labour market closely and adjust monetary policy to support sustainable growth in the economy and the achievement of the inflation target over time.

When and how?

If the natural interest rate falls faster than short-term interest rate set by the Central Bank, then monetary policy is effectively getting tighter and not easier despite the fact that interest rates are actually falling.
Most people also do not seem to understand that the natural interest rate is endogenous. It responds to economic conditions and is determined by the marginal producivity of capital as well as the savings and investment behavior of economic agents. Central Banks can only influence these variable very indirectly at best. Central Banks in advanced economies didn’t decide to set interest rates at zero for now almost a decade. They did it because they had no other choice. The global real interest rate fell from roughly 5% in the 1980s to about 0% nowadays. Some Central Banks like the Swedish Riksbank as well as the ECB have tried to raise interest rates over the last years, but to no avail. They found themselves in the unfortunate situation that they had to reverse course because economic conditions deteriorated again at a rapid pace. a href="https://macrothoughts.weebly.com/blog/the-interest-rate-fallacy-once-again">Link

This indirectly corroborates the view I have been putting forward here for some time now that the natural rate of interest is actually a trend not a static amount.

Well they couldn't cut during the election, so they cut now. Their economy is in a lot of trouble.

Their economy is never in "Trouble" its far more robust than ours will ever be. If they are in "Trouble" then we are in the "Toilet". Way better lifestyle over there, Kiwi's just need to accept it, we are the poor cousin Bro.