Jun 07 2019
The Reserve Bank board has cut the official cash rate by 25 basis points to 1.25 per cent, ending Australia’s longest ever period without a change in the cash rate of 32 consecutive months since August 2016. Prior to that, the cash rate had consistently declined from the high of 4.75 per cent in October 2011.
The decision was made in an effort to support employment growth and provide greater confidence that inflation will be consistent with the medium-term target. According to a statement released by the RBA, the recent inflation outcomes have been lower than expected and suggest subdued inflationary pressures across much of the economy. A lower cash rate is expected to help get inflation back towards the central bank’s 2-3 per cent target band.
While the outlook for the global economy remains reasonable, there are has been an increase in downside risks stemming from trade disputes. As a result, growth in international trade remains weak. Domestically, the main uncertainty is household consumption. This is largely due to a period of low-income growth along with declining housing prices, which have dampened consumer expenditure.
Apart from supporting inflation, the cuts are also set to benefit Australian households and businesses hoping to borrow money this year, with banks expected to pass on most of the rate cut to borrowers. Lower interest rates on home loans and business loans are forecast to support consumer sentiment and business confidence. Lower mortgage rates and more relaxed serviceability assessments on new mortgages will help ease the downward pressure on the property market while lower business loan rates are expected to support businesses’ outlook on the economy. A lower cash rate will also help curb weakening consumer spending and stimulate economic activity.