
Australia Cuts Rates to Historic Lows to Combat Deflation, According to Reuters
By Wayne Cole
SYDNEY – Australia’s central bank lowered its cash rate by a quarter point to an unprecedented low of 1.5 percent on Tuesday, marking the second reduction this year as it aims to protect the economy from rising deflation and manage a strong national currency.
Initially, the local dollar slipped following the Reserve Bank of Australia’s (RBA) anticipated decision; however, it swiftly rebounded as investors speculated about potential rate cuts from other central banks, highlighting the difficulty of maintaining currency value in an environment where negative interest rates have become common.
"The Reserve Bank is clearly focused on avoiding the near-zero inflation rates seen in many comparable countries," said Shane Oliver, chief economist at AMP Capital Investors.
"With inflation rates so low, the risk that the dollar could have risen to 76-77 U.S. cents if they hadn’t cut rates led them to believe action was needed."
The Australian dollar was last observed at $0.7528 after dipping as low as $0.7486 at one point. This stability has led the market to price in a possibility of another rate cut to 1.25 percent.
Interbank futures suggest a 68 percent likelihood of a further reduction by December. Similarly, yields on three-year government bonds dropped to 1.39 percent, making them cheaper than overnight borrowing.
RBA Governor Glenn Stevens, who will retire next month after a decade in leadership, remained non-committal regarding future policy directions.
"The Board concluded that easing monetary policy at this meeting would likely enhance the prospects for sustainable economic growth and return inflation to target over time," Stevens noted, while indicating that inflation is expected to remain low for an extended period.
Recent data revealed that consumer price inflation has reached a 17-year low during the June quarter, while underlying inflation fell to an all-time low of 1.5 percent. This is significantly below the RBA’s long-term target range of 2 to 3 percent, implying that the economy would need to accelerate growth to avoid the normalization of disinflation.
LESS RISK FROM HOUSING
In contrast, neighboring New Zealand currently battles a similar issue, with inflation at only 0.4 percent, prompting intense pressure on its central bank to lower rates at an upcoming meeting. Japan, which has long faced deflation, recently expanded its stimulus measures, and analysts widely expect the Bank of England to initiate easing later this week.
A rate hike from the Federal Reserve could assist by strengthening the U.S. dollar, but officials there appear to be in no rush to make any moves.
Concerns have arisen that persistently low rates might fuel excessive borrowing in the housing market, given that Australian households are among the world’s most indebted. The Commonwealth Bank quickly adjusted its variable mortgage rate to 5.22 percent, although many special offers mean borrowers can secure rates below 5 percent.
Nevertheless, cheaper borrowing has also stimulated a boom in home construction, which seems to be cooling down housing prices. Recent figures from property consultant CoreLogic revealed that annual growth in home prices for Australia’s capital cities slowed to 6.1 percent in July, down from 8.3 percent in June and a significant drop from last year’s peak above 11 percent.
Stevens, himself, pointed out the expected influx of new apartments over the next couple of years and noted that lending for property investment has already tapered off.
"All of this suggests that the risk of lower interest rates worsening issues in the housing market has diminished," Stevens stated in his post-meeting remarks.