Australia’s central bank, the Reserve Bank of Australia (RBA), unexpectedly cut its main interest rate this week. The 0.25% reduction to 2.25% was the RBA’s first cut since mid-2013, and leaves rates at a record low. The Australian dollar, the Aussie, slipped to 77 US cents, a five-and-a-half-year low.
The RBA is concerned that the economy, which expanded by 2.7% in the year to last September, is slowing more than it initially forecast. Inflation has tumbled below its 2%-3% target band and is set for more falls as transport costs decline.
What the commentators said
The central bank wants a weaker Aussie to secure balanced growth in the economy. At present, said ANZ’s Daniel Been, the Aussie is “still merely acting as a shock absorber to the economy, rather than providing any outright stimulus”.
But the RBA will be facing an uphill struggle. Australia is “facing its greatest challenge in a generation”, as the FT’s Jamie Smyth noted. The China-induced commodity boom, which helped Australia through the global financial crisis without a recession, has cooled, denting exports of iron ore and coal. This has squeezed overall investment and income growth, and the rest of the economy looks unable to pick up the slack convincingly.
The high Aussie of the past few years has dented the non-mining industrial sector, while households have one of the developed world’s highest debt burdens, almost 180%. A benign inflation outlook implies room for further rate cuts, but the snag is that cheaper money could give the already overinflated housing market further stimulus.
Government spending has been reined in, added Morgan Stanley, as the government has committed itself to fiscal consolidation. During the mining boom, the Aussie was so strong that the number of overseas trips Australians took doubled in the decade to 2013. Those days won’t be back in a hurry.