Fear of a job-destroying deflationary spiral has compelled the Reserve Bank to cut interest rates to a new historic low of 1.75 per cent today, risking another politically charged spike in house prices and bounce in household debt.
As journalists begin to pore over Scott Morrison’s first budget in Canberra, due for release tonight, the Reserve Bank Board has announced it will cut the cash rate below 2 per cent.
National Australia Bank announced within minutes of the decision that it would pass on the 25 basis point reduction in full.
Despite a falling unemployment rate and above average economic growth, a shock 0.2 per cent fall in the consumer price index over the first three months of the year convinced the Board to cut interest rates for the first time since May last year.
The decline left the annual inflation rate, even stripping out volatile items, at 1.6 per cent, far below the Reserve Bank’s minimum target level of 2 per cent and the lowest rate in at least a decade.
The decision will put pressure on Australian banks, which have been raising their key lending rates in recent months, to cut their business and lending rates by 0.25 percentage points.
It also casts doubt on the strength of Australia’s economy, which grew 3 per cent in 2015 but faces challenging global conditions this year as China’s economy slows and the US recovery falters.
Despite trillions of dollars of monetary stimulus and record low interest rates since the global financial crisis, consumer price inflation has remained very low throughout advanced countries. The IMF has routinely marked down global growth forecasts.
The RBA’s decision came despite reports of resilient business confidence and conditions yesterday both in and outside the mining sector, and the unemployment rate falling to a 2.5-year low of 5.7 per cent in April.