RBA cuts rate to 2.0 %
The Reserve Bank of Australia (RBA) lowered the official cash interest rate by 0.25% to 2.0% at May’s meeting.
It has notably removed previous comments indicating ‘a further easing of policy may be appropriate’, indicating that the RBA now has a neutral stance on monetary policy and no immediate prospect for a further interest rate cut. We expect the RBA is likely to keep interest rates steady over coming months.
RBA Governor Glenn Stevens made the following observations in the May statement:
Australia’s economy has seen improved trends in household demand over the past six months and stronger growth in employment. Australia’s low interest rates are acting to support borrowing and spending with stronger lending to business and rising house prices (strongly in Sydney, though trends have been varied in a number of other cities).
There is likely to be weakness in business capital expenditure in both the mining and non-mining sectors over the coming year. Notably, government spending is also scheduled to be subdued.
Hence the RBA judged that the Australian economy is therefore likely to be operating with a degree of spare capacity for some time yet. The RBA expects that Australia’s inflation is forecast to remain consistent with the target over the next one to two years of 2% to 3%.
Australia’s commodity prices have declined over the past year, in some cases sharply, given increased supply, including from Australia.
For the Australian dollar, the RBA considers that a further depreciation seems both likely and necessary given the significant declines in key commodity prices.
The RBA board judged that the inflation outlook provided the opportunity to lower interest rates at this May meeting. Given the RBA now has a neutral stance on monetary policy, we expect the RBA is likely to keep the cash interest rates steady at 2.0% over coming months.