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The Reserve Bank of Australia has cut rates to a new record low as it looks to spark historically weak inflation. At its policy meeting on Tuesday, the central bank said it had decided to reduce the cash rate by 25 basis points to 1.50 percent, its second such move this year.
In line with the protocol outlined in May 2015 that there would be no forward guidance at meetings when rates are changed, the central bank's policy statement provided no hint that the RBA intends to cut rates further.
The action follows a cut in May as the central bank desperately tries to address a 17-year low inflation rate. Last week, June quarter numbers showed headline inflation at 1.1 percent year-on-year. The RBA said pricing pressures remained modest and dormant inflation was unlikely to be revived in the near-term.
RBA’s decision to lower their key policy rate by 0.25 percentage point to 1.50 percent had limited impact on the Aussie. Australian dollar seemed resilient at the time of writing, testing session highs at 0.7570 after a brief knee-jerk slump to 0.7480 levels.
The uptick is indeed surprising given that the RBA’s policy decision was judged as a close call ahead of the meeting and far from fully priced in the interest rate market, with the chances seen at 72.7 per cent earlier today. Recent rebound in the price of iron ore likely provided the lift. Investor concerns over slowing growth in China have also diminished in the near-term helping to ease downward pressure on the Aussie.
Capital Economics chief Australian economist Paul Dales tipped further cuts from the RBA if it is eager to meet its two to three per cent medium-term inflation target. “If it is going to weaken the Australian dollar to help solve its low inflation problem, the RBA may have to follow today’s interest rate cut with more cuts to 1 percent sometime next year,” he said, adding such moves could drag the local currency down to US65c.
