Australia cuts key interest rate to record low
The Reserve Bank of Australia cut its benchmark interest rate yesterday to a record low, driving down a currency the strength of which has damaged manufacturing and boosted unemployment.
RBA governor Glenn Stevens reduced the overnight cash rate target by a quarter percentage point to 2.75 per cent, saying in a statement the Australian dollar's record strength "is unusual given the decline in export prices and interest rates".
"The board has previously noted that the inflation outlook would afford scope to ease further," Stevens said. "The board decided to use some of that scope. It judged that a further decline in the cash rate was appropriate to encourage sustainable growth in the economy."
He joins global counterparts in embracing record low rates in an economy where inflation is contained, mining spending is predicted to crest, and credit growth remains subdued.
"It's a seminal decision to put a 2 in front of a decimal point for interest rates, and the RBA has decided to maintain its easing bias," said Joshua Williamson, a senior economist at Citigroup who had predicted the decision. "The currency has been the thorn in their side, and the inflation data was the catalyst to act on the exchange rate concern."
The Australian dollar fell to US$1.0199 in Sydney, from US$1.0238 before the cut.
The United States, Europe and Japan have cut rates to a record to stimulate demand. US Federal Reserve chairman Ben Bernanke has kept the key US rate near zero for more than four years, while European Central Bank president Mario Draghi said on Monday policymakers were ready to cut again after reducing the ECB's benchmark to a record low 0.5 per cent last week.
The RBA cash rate's previous low was 2.89 per cent in January 1960. Australia, which has not recorded a current account surplus since 1975, typically maintains higher benchmark interest rates than other developed economies to attract capital inflows to offset its current account deficit.