Australia: Cash Rate Cut to Record Low of 2.5%

Consensus Forecasts

As widely expected, the Reserve Bank of Australia (RBA) slashed its cash rate to a new low of 2.5% at the monthly rate-setting meeting held on August 6. The RBA shaved 25 basis points off the benchmark interest rate to levels not seen since the central bank’s inception in 1959, and the move comes just weeks ahead of the federal election due on September 7. Governor Glenn Stevens cited subdued inflationary pressures and retail sales data as factors influencing the recent rate cut. Indeed, June reported its weakest retail numbers since the credit squeeze of 1961 after sales remained flat in the month at A$21.8bn. This was due to a combination of lower retail prices and weak consumer demand. A softer labour market (unemployment edged up to 5.6% in Q2) and weaker sentiment over the economy’s outlook have put pressure on retailers to keep prices low, while at the same time households have continued to pare down debt rather than step up their discretionary spending. Equally unimpressive was June’s report for building approvals, which took another tumble after plunging by 6.9% (m-o-m). The latest figure compares to the previous month’s downwardly revised decline of 4.3%, and dents earlier hopes of a pick up in building activity after April reported a 9.5% (m-o-m) rise in building approvals. In light of the recent batch of soft economic data releases, our panel has downgraded its 2013 GDP growth projection this month.

On a more positive note, Australia posted a trade surplus of A$602mn in June, which was 19.0% higher over the previous month and marked the fifth consecutive month the trade balance stayed in the black. June’s figure was also the highest monthly trade surplus in 18 months even though exports fell by 1.0% (m-o-m) and imports were down 2.0%.

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