Reserve Bank Of Australia Cuts Cash Rate On Weaker Economic Outlook

Reserve Bank Of Australia Cuts Cash Rate On Weaker Economic Outlook

The Reserve Bank of Australia lowered the benchmark cash rate for a third time this year on Tuesday, citing the weaker economic outlook on the back of recent global developments. The central bank, at the same time, stressed the need to boost demand outside the resources sector.

The RBA Policy Board slashed the cash rate by 25 basis points to 3.25 percent, effective October 3. The move followed a 50-basis point cut in May and a 25-basis point reduction in June, which came after two consecutive rate cuts towards the end of last year.

"At today's meeting, the Board judged that, on the back of international developments, the growth outlook for next year looked a little weaker, while inflation was expected to be consistent with the target over the next one to two years," Governor Glenn Stevens said in a statement.

"The Board therefore decided that it was appropriate for the stance of monetary policy to be a little more accommodative."

According to official data, the economy grew 0.6 percent quarter-on-quarter in the second quarter following 1.4 percent expansion in the first quarter.

Stevens said most indicators available for this meeting suggest that growth has been running close to trend, led by very large increases in capital spending in the resources sector. However, he added that the peak in resource investment, expected to occur next year, may be weaker than thought.

The RBA chief stressed that the need to strengthen some other components of demand is becoming important as this peak approaches. He said the terms of trade have declined by over 10 percent since the peak last year and will probably decline further, though they are likely to remain historically high.

The central banker also noted that interest rates for borrowers are still a little below their medium-term averages. According to him, there are tentative signs of this starting to have some of the expected effects, though the impact of monetary policy changes takes some time to work through the economy.

At the same time, credit growth has softened and the exchange rate has remained higher than might have been expected, given the observed decline in export prices and the weaker global outlook, the bank said.

Commodity prices for Australia have remained significantly weaker than early this year, even though some have regained some ground in recent weeks.

Australian banks have had no difficulty accessing funding, including on an unsecured basis, Stevens reiterated. However, long-term interest rates faced by highly rated sovereigns, including Australia, remained at exceptionally low levels due to low appetite for risk.

Investment in dwellings remained subdued, though there have been some tentative signs of improvement. Non-residential building investment also remained weak.

On the developments in the global economy, the Board said the outlook for growth in the world economy has softened over recent months, with estimates for global GDP being edged down. Risks to the outlook still seen to be on the downside.

Economic activity in Europe is contracting, while growth in the U.S. remains modest. Growth in China has also slowed, and uncertainty about near-term prospects is greater than it was some months ago, it noted.