Australia: Reserve Bank Unexpectedly Cuts Rates

Consensus Forecasts

In a surprise move the Reserve Bank of Australia (RBA) trimmed interest rates by a quarter of a percentage point to a record low of 2.75% at this month’s monetary policy meeting. The rate cut came amid concerns over a persistently strong currency, which has been hurting both manufacturers and exporters. The exchange rate has remained at a historically high level over the past 18 months and has not only hit businesses’ profit margins, but also contributed to a A$12bn shortfall in tax revenues. Consequently, this has dented the government’s hope of securing an annual budget surplus for the current fiscal year. Apart from the strong A$, low inflation was also behind the rate cut as consumer price rises stayed within the RBA’s target range of 2-3% at 2.5% (y-o-y) in Q1. The authorities hope lower rates will help counter the slowdown already underway in the economy. Data releases for March appear to support the RBA’s recent decision as both building approvals and retail activity declined in month-on-month terms. Retail spending fell by 0.4% against a rise of 1.3% witnessed in both January and February, while total dwelling units approved dropped by 5.5%, marking the steepest monthly decline since July 2012. On the other hand, labour market data improved slightly after the unemployment rate fell unexpectedly from 5.6% to 5.5% in April as the economy created more than 50,000 new jobs, compensating for a drop in March. Supported by looser monetary conditions, growth expectations have stayed firm for this year.

Meanwhile, Australia’s trade balance posted a surplus of A$0.3bn in March, up from a revised deficit of A$0.1bn in the previous month. The surplus can be attributed to a steep decline in capital goods imports of 11.5% (m-o-m) and a slight jump in the export value of metals, ore and minerals.

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