The Reserve Bank of Australia has cut the official cash rate to an unprecedented 1.5 per cent to maintain downward pressure on the currency and spur sluggish inflation and business investment.
As was forecast by most analysts, the board lowered the cash rate by 0.25 of a percentage point from 1.75 per cent on Tuesday.
Reserve Bank governor Glenn Stevens said in a statement that “the likelihood of lower interest rates exacerbating risks in the housing market has diminished”.
The RBA statement said supervisory measures have strengthened lending standards in the housing market.
“Separately, a number of lenders are also taking a more cautious attitude to lending in certain segments. The most recent information suggests that dwelling prices have been rising only moderately over the course of this year, with considerable supply of apartments scheduled to come on stream over the next couple of years, particularly in the eastern capital cities. Growth in lending for housing purposes has slowed a little this year,” the statement says.
The Commonwealth Bank of Australia immediately said it would pass on just over half the interest rate cut, 13 basis points, but increase its one-year deposit rate by 55 basis points to 3 per cent.
The latest move takes the total cuts since late 2011 – when the terms of trade peaked – to 3.25 percentage points and puts Australia less than two more cuts away from what Reserve Bank officials have suggested is the “zero-bound”, or limit, of traditional monetary policy.
Once the cash rate falls below around 1 per cent the central bank may need to consider unconventional policies such as quantitative easing if it wants to add more stimulus.
“While Tuesday’s reduction is likely to help avoid the currency rising above US80¢, it risks creating further distortions in parts of Sydney’s overheated property market it is also likely to enrage savers already confronting to lowest benchmark 10-year sovereign yields on record.
“Treasurer Scott Morrison appeared to lend support to the latest rate cut on Monday when he emphasised the nation faces a “really big challenge” in shaking off low inflation, low wages growth and low levels of business investment, as well as spill overs from a weaker-than-expected US economy.
“I have no doubt that Glenn Stevens… is keenly focused on that.”
The Australian dollar fell to US75.14¢ from around US75.47¢ just before the decision was announced. The currency traded as high as US76.15¢ on Monday, a three-week high.
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