RBA slashes cash rate to new record low to boost inflation, economic growth

The Reserve Bank of Australia in its monetary policy meeting held Tuesday slashed the official cash rate to a new record low, after remaining on hold for about three months, in an attempt to boost the weak inflation and underlying fragile economic growth.

The Reserve Bank of Australia has cut the official cash rate by 25 basis points to a historic low of 1.5 percent, for the first time in three months, marking its second such move this year. RBA Governor Glenn Stevens said that recent data suggested growth was continuing at a moderate pace, despite a big decline in business investment.

He also said that monetary policy has remained accommodative for some time and appreciation in the Australian dollar could complicate the economic adjustment. Stevens pointed towards a 17-year low inflation rate which is expected to stick around for the time being while low interest rates were making banks more willing to lend money, which was helping the economy.  

The governor in his monetary policy statement mentioned that underlying pace of growth in the Chinese economy appears to be moderating  while the domestic labor market data will continue to be somewhat mixed, posing lesser risk of low rates overheating the property market, he added.

Moreover, headline consumer price index during the month of June marginally rose 1.0 percent y/y, exerting the slightest pressure on consumer prices since 1999, which remained well below the RBA’s target band of 2-3 percent. Moreover, the fact that AUD/USD has strengthened over the last couple of months also augmented for a 25 basis points rate cut by the RBA.

Meanwhile, markets now primarily focus on the updated economic forecasts published in the Statement of Monetary Policy, to be released on August 5. However, Tuesday's board meeting was Stevens' second last. He will be succeeded on September 18 by his deputy, Philip Lowe.