RBA cuts cash rate to 2.5 percent

The Reserve Bank of Australia has cut the cash rate to a historic low of 2.

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5 per cent at its August board meeting, in the first cut during an election campaign since 1990, citing below average growth and moderating commodity prices.

The cut brings the official cash rate to lows not seen since the central bank’s 1959 establishment, just weeks ahead of the September 7 federal election.

RBA Governor Glenn Stevens cited recent muted inflation and retail sales data in unveiling the cut, which follows a grim pre-election budget update from the ruling Labor party last week.

“The economy has been growing a bit below trend over the past year. This is expected to continue in the near term as the economy adjusts to lower levels of mining investment,” Stevens said.

The peak in Australia’s decade-long Asia-led mining investment boom and slowdown in key market China saw Labor scale back its growth forecasts for 2013/14 to 2.5 percent and bump up unemployment to 6.25 percent last week, compared with 2.75 percent and 5.75 percent seen in the May budget.

Tuesday’s decision is a mixed bag for Labor. While it underscores fears of an economic slowdown seized on by the conservatives as evidence of mismanagement, it also means an easing in cost-of-living pressures for key mortgage-belt voters.

The Australian dollar edged up slightly on the decision, with some investors expecting a more drastic 50-basis-point cut, to 89.55 US cents from 89.23 cents immediately prior.

The RBA last cut the cash rate by a quarter of a percentage point in May, after making four cuts in 2012.

Full text of the RBA’s rates statement

Statement by Glenn Stevens, Governor: Monetary Policy Decision

At its meeting today, the Board decided to lower the cash rate by 25 basis points to 2.5 per cent, effective 7 August 2013. Recent information is consistent with global growth running a bit below average this year, with reasonable prospects of a pick-up next year.

Commodity prices have declined but, overall, remain at high levels by historical standards. Inflation has moderated over recent months in a number of countries.

Globally, financial conditions remain very accommodative, though the recent reassessment by markets of the outlook for US monetary policy has seen a noticeable rise in sovereign bond yields, from exceptionally low levels.

Volatility in financial markets has increased and has affected a number of emerging market economies in particular. In Australia, the economy has been growing a bit below trend over the past year.

This is expected to continue in the near term as the economy adjusts to lower levels of mining investment. The unemployment rate has edged higher.

Recent data confirm that inflation has been consistent with the medium-term target. With growth in labour costs moderating, this is expected to remain the case over the next one to two years, even with the effects of the recent depreciation of the exchange rate.

The easing in monetary policy over the past 18 months has supported interest-sensitive spending and asset values, and further effects can be expected over time.

The pace of borrowing has remained relatively subdued, though recently there are signs of increased demand for finance by households.

The Australian dollar has depreciated by around 15 per cent since early April, although it remains at a high level. It is possible that the exchange rate will depreciate further over time, which would help to foster a rebalancing of growth in the economy.

The Board has previously noted that the inflation outlook could provide some scope to ease policy further, should that be required to support demand. At today’s meeting, and taking account of recent information on prices and activity, the Board judged that a further decline in the cash rate was appropriate.

The Board will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the inflation target over time.

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