Oct 09 2019
Last week, the Reserve Bank of Australia (RBA) cut the official cash rate by 25 basis points to 0.75 per cent. This is the third such cut over the past five months, and it is now at a record low. It is also the fastest decline in the cash rate since the European debt crisis and the end of the mining boom in mid-2012.
This decision was driven by lower than expected economic growth and inflation below the 2-3 per cent target range. The goal is to stimulate spending and economic growth. The RBA’s overall policy objective is price stability, full employment and economic prosperity and welfare. The lowering of the cash rate is designed to encourage consumer spending, spending in the housing sector and business investment.
In its official statement released following the rate cut decision, the RBA reinforced the need for the unemployment rate to fall below the current level of 5.25 per cent in order to reach full employment. This is estimated to be between 4.5 and 5.0 per cent. The low inflation outcomes over recent quarters, though below the medium-term target, gives the RBA more leeway to cut rates to attempt to stimulate economic growth without worrying about higher inflation. Furthermore, the RBA also noted that the labour force participation rate is at a record high.
External factors have also played a role in the RBA’s decision. Continued rate cuts by the United States’ Federal Reserve has almost forced the RBA to follow suit in order to avoid upward pressure on the Australian dollar. A lower Australian dollar boosts the competitiveness of our exports in the global market, which supports economic growth. In addition, the RBA noted that the ongoing trade and technology disputes between the United States and China has increased global economic uncertainty, leading to subdued growth.