Reserve Bank slashes rates to historical low

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Reserve Bank of Australia
The Reserve Bank of Australia has announced the cash rate will fall to 2.75 per cent.
THE Reserve Bank today surprised many commentators by cutting interest rates to a historic low of 2.75 per cent in its first move on rates since December last year. 

The 25 basis point drop marks the first time the bank has cut interest rates below 3 per cent since it began setting monetary policy.

The Real Estate Institute of Australia president, Peter Bushby, was quick to congratulate the bank’s “sensible” decision  to cut rates. 

The central bank says growth in Australia was close to trend in 2012 overall, but was a bit below trend in the second half of the year, and this appears to have continued into 2013. Employment has continued to grow but more slowly than the labour force, so that the rate of unemployment has increased a little, though it remains relatively low.

“Recent data on prices confirm that inflation is consistent with the target and, if anything, a little lower than expected,” the bank says.

“The CPI rose by 2½ per cent over the past year, and measures of underlying inflation gave a broadly similar outcome. These results have been pushed up a little by the impact of the carbon price. Growth of labour costs has moderated slightly over recent quarters while productivity growth appears to be improving. This should help to lessen increases in prices for non-tradables. The bank’s forecast remains that inflation over the next one to two years will be consistent with the target.

“Over recent meetings, the Board has noted that interest rates have already been reduced substantially, with borrowing rates approaching previous lows, and that the effects of this on the economy are continuing to emerge. Savers have been changing their portfolios towards assets with higher expected returns, asset values have risen and some interest-sensitive areas of spending have increased.

“The exchange rate, on the other hand, has been little changed at a historically high level over the past 18 months, which is unusual given the decline in export prices and interest rates during that time. Moreover, the demand for credit remains, at this point, relatively subdued.

“The Board has previously noted that the inflation outlook would afford scope to ease further, should that be necessary to support demand. At today’s meeting the Board decided to use some of that scope. It judged that a further decline in the cash rate was appropriate to encourage sustainable growth in the economy, consistent with achieving the inflation target.”

 

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