Australians are celebrating more than Dunaden’s win in the Melbourne Cup today with the Reserve Bank of Australia answering the distress calls from businesses and consumers by cutting interest rates for the first time in over two and a half years.
The central bank cut the benchmark interest rate by 25 basis points to 4.5%, effective 2 November.
It was the first cut since April 2009 when rates dropped as low as 3% at the tail end of the global financial crisis. Since then, there has been seven rate hikes starting in October 2009, the last of which pushed us up to 4.75% a year ago.
The decision follows last week’s moderation in inflation, with inflation concerns being the main hurdle to rate cuts in the past few months. The annual pace of consumer price increases eased to 3.5% in the three months ended September from 3.6% the previous quarter. More importantly, declines in the two measures of core inflation, the weighted mean and the trimmed mean, to 2.6% and 2.3% from 2.9% and 2.6%, respectively, opened the way for the RBA to cut rates and ease business and consumer anxiety about the state of the global economy. The RBA prefers the core measures of inflation because they strip out volatile price movements, allowing them to monitor underlying price movements.
“After underlying inflation started to pick up in the first half of the year, recent information suggests the subdued demand conditions and the high exchange rate have contained inflation more recently, notwithstanding continuing sizeable increases in utilities charges,” RBA governor Glenn Stevens said in a statement. “With labour market conditions now softer, the likelihood of a significant acceleration in labour costs outside the resources and related sectors in the near term has lessened.”
The RBA didn’t indicate whether or not we could expect another rate cut any time soon, saying that a neutral stance (which is considered to be 4.5%) was “consistent” with keeping core inflation within their 2-3% target range.
Economists were divided over whether the RBA would cut rates today, and they are equally divided on whether another will follow given that today’s call was such a line-ball decision. Complicating matters is history, with previous rate cuts always being followed by another.
“For now, we will stick with our forecast of another rate cut in February, though on current developments and our forecasts for inflation and GDP growth, this is a finely balanced call with the likelihood that this might be the first ever once-off rate adjustment,” ANZ economist Ivan Colhoun said. “How consumer and business confidence responds to this interest rate cut will be very important in whether a further move is forthcoming from the RBA.”
The RBA will release it’s Statement on Monetary Policy on Friday, giving more insight into it’s stance on inflation and the economy. The next interest rate call will be made on 6 December.
