The Reserve Bank of Australia cut its cashrate by 25 basis points today to 1.25%.
New Zealand’s Reserve Bank reduced its official cashrate by 25 basis points to 1.5% on 8 May, its first cut since 2016.
The US Federal reserve’s last shift was in December, when it raised its funds rate by 25 points to a range of 2.25-2.5%, its fourth rate hike of the year.
The Australian bank’s governor, Philip Lowe, said today his board made its decision “to support employment growth and provide greater confidence that inflation will be consistent with the medium-term target”.
On its impact he said: “Today’s decision to lower the cashrate will help make further inroads into the spare capacity in the economy. It will assist with faster progress in reducing unemployment and achieve more assured progress towards the inflation target.
“The board will continue to monitor developments in the labour market closely and adjust monetary policy to support sustainable growth in the economy and the achievement of the inflation target over time.”
Giving the background to the decision, Dr Lowe said: “The outlook for the global economy remains reasonable, although the downside risks stemming from the trade disputes have increased. Growth in international trade remains weak and the increased uncertainty is affecting investment intentions in a number of countries.
“In China, the authorities have taken steps to support the economy, while addressing risks in the financial system. In most advanced economies, inflation remains subdued, unemployment rates are low and wages growth has picked up.
“Global financial conditions remain accommodative. Long-term bond yields & risk premiums are low. In Australia, long-term bond yields are at historically low levels. Bank funding costs have also declined further, with money-market spreads having fully reversed the increases that took place last year. The $Ar has depreciated a little over the past few months and is at the low end of its narrow range of recent times.
“The central scenario remains for the Australian economy to grow by around 2¾% in 2019 % 2020. This outlook is supported by increased investment in infrastructure and a pickup in activity in the resources sector, partly in response to an increase in the prices of Australia’s exports.
“The main domestic uncertainty continues to be the outlook for household consumption, which is being affected by a protracted period of low income growth & declining housing prices. Some pickup in growth in household disposable income is expected and this should support consumption.
“Employment growth has been strong over the past year, labour force participation has been increasing, the vacancy rate remains high and there are reports of skills shortages in some areas.
“Despite these developments, there has been little further inroads into the spare capacity in the labour market of late. The unemployment rate had been steady at around 5% for some months, but ticked up to 5.2% in April. The strong employment growth over the past year or so has led to a pickup in wages growth in the private sector, although overall wages growth remains low. A further gradual lift in wages growth is expected and this would be a welcome development. Taken together, these labour market outcomes suggest that the Australian economy can sustain a lower rate of unemployment.
“The recent inflation outcomes have been lower than expected and suggest subdued inflationary pressures across much of the economy. Inflation is still, however, anticipated to pick up, and will be boosted in the June quarter by increases in petrol prices. The central scenario remains for underlying inflation to be 1¾% this year, 2% in 2020 and a little higher after that.
“The adjustment in established housing markets is continuing, after the earlier large runup in prices in some cities. Conditions remain soft, although in some markets the rate of price decline has slowed and auction clearance rates have increased. Growth in housing credit has also stabilised recently.
“Credit conditions have been tightened and the demand for credit by investors has been subdued for some time. Mortgage rates remain low and there is strong competition for borrowers of high credit quality.”
Attribution: Bank release.