Australia slashes interest rate to 2.25%

Australia slashes interest rate to 2.25%

Tuesday, February 3, 2015 7:28 am

Reserve Bank of Australia: cuts interest rate to spur growth

Reserve Bank of Australia: cuts interest rate to spur growth

Australia’s central bank on Tuesday lowered its key interest rate by 25 basis points to a new record low of 2.25 percent, saying after a year-and-a-half on hold the cut was justified to spur growth.

The Reserve Bank of Australia said the economy was expanding at a below-trend pace and inflation was low, while unemployment had risen in the past year and was expected to climb further.

The Australian dollar plunged to 76.59 US cents, from around 78 cents before the announcement. However, the S&P/ASX 200 stock index surged in afternoon trade to close up 1.46 percent.

“At today’s meeting, taking into account the flow of recent information and updated forecasts, the board judged that, on balance, a further reduction in the cash rate was appropriate,” RBA governor Glenn Stevens said.

“This action is expected to add some further support to demand, so as to foster sustainable growth and inflation outcomes consistent with the target.”

Treasurer Joe Hockey welcomed the cut and said the central bank had room to move further, particularly as the fall in global oil prices had delivered lower costs at the petrol pump, dampening inflation.

“This is good news for Australia,” Hockey said of the RBA’s first rate cut since August 2013.

“It is going to help the Australian economy. It is going to help to create more jobs because business is going to be able to pay less for their debt as consumers should pay less for their debt and as people with a mortgage should pay less for their debt.”

Analysts had suggested that a rate cut could see record house prices climb further as mortgages became more affordable, but the RBA said it was “working with other regulators to assess and contain economic risks that may arise from the housing market”.

– ‘Insurance policy’ –

Pressure had been building on the central bank to cut interest rates as growth in the economy remained sluggish and as plunging prices for key commodities such as iron ore weighed on revenues.

Softening GDP growth figures in December showed the economy expanded by just 0.3 percent in the third quarter to take the annual growth rate to a below-trend 2.7 percent, while unemployment is at a near a decade-long high of 6.1 percent.

The central bank said while the Australian dollar had declined against the rising US dollar in recent months, it “remains above most estimates of its fundamental value”.

“A lower exchange rate is likely to be needed to achieve balanced growth in the economy,” it said.

Chief economist at AMP Capital, Shane Oliver, said a cut would be like “an insurance policy” for the economy amid continuing uncertainty about the speed of the slowdown in the mining sector and the pace at which the rest of the economy will pick up.

“I don’t think it’s a situation like late 2008 when the world was falling apart and it had to be cut to head off a recession or anything like that,” he told AFP ahead of the decision.

“It’s really like taking insurance to fine-tune the economy to make sure that growth does continue and, in fact, picks up.”

Economists said the RBA’s decision and the likelihood that the economy will continue to slow indicated more cuts will follow.

“The tone of the statement is quite dovish with obvious concern for underlying growth in domestic demand,” ANZ chief economist Warren Hogan said.

“Our initial reading is the RBA could well follow up today’s move in March and it therefore does raise the possibility, at least for market expectations, of a cash rate below 2.0 percent this year.”

Westpac economist Bill Evans said while the rate cut had been expected, “the bank would not have disturbed such a long period of interest rate stability for just one move”.

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