World Economy

RBA Cuts Rates, Aussie Plunges

RBA Cuts Rates, Aussie PlungesRBA Cuts Rates, Aussie Plunges

Australia’s central bank cut interest rates to a fresh record low as it moves to counter the emergence of disinflation that’s swept the developed world and limit currency gains that could complicate an economic transition.

Australia’s dollar tumbled against all of its major peers, while the nation’s shares and bonds rallied following the rate cut. The yen rose to an 18-month high and Asian stocks were near a two-week low as Chinese manufacturing data added to evidence of a lackluster global economy, Bloomberg reported.

Reserve Bank of Australia Governor Glenn Stevens and his board lowered the cash rate by 25 basis points to 1.75% Tuesday, as predicted by 12 of 27 economists surveyed. Data last week showed quarterly deflation in the consumer price index and the weakest annual gain on record for core inflation—which the RBA aims to keep between 2% and 3% on average.

“Inflation has been quite low for some time and recent data were unexpectedly low,” Stevens said in his statement. “These results, together with ongoing very subdued growth in labor costs and very low cost pressures elsewhere in the world, point to a lower outlook for inflation than previously forecast.”

The Australian dollar fell after the decision, trading at 75.66 US cents in Sydney, from as high as 77.19 cents earlier in the day.

The Aussie reversed an earlier gain versus the greenback after Reserve Bank of Australia reduced its benchmark rate by a quarter of a percentage point to a record low, wrong-footing most economists.

The yen strengthened beyond 106 a dollar for the first time since October 2014, helping push the Bloomberg Dollar Spot Index to its lowest in almost a year. A gauge of Asian equities that excludes Japan, where markets are shut until Friday, declined for a fifth day. Industrial metals dropped in London, while gold climbed to a 15-month high. Crude oil rose to around $45 a barrel in New York.

  Monitoring the Impact

The RBA has also been monitoring the impact of tighter regulations on home loans as residential prices in Sydney and Melbourne surged on easy policy.

Global policy is diverging and creating cross-currents as Europe and Japan move to negative rates and the US tightens policy. That, together with a resurgent price for Australia’s biggest export, iron ore, has helped lift the Aussie dollar.

The RBA reiterated that “an appreciating exchange rate could complicate” the economy’s transition. It also noted the rebound in the iron ore price in response to policy easing in China, Australia’s biggest trading partner.

“Commodity prices have firmed noticeably from recent lows, but this follows very substantial declines over the past couple of years,” Stevens said. “Australia’s terms of trade remain much lower than they had been in recent years.”

Stevens was upbeat on Australia’s growth after the economy expanded 3% last year. “Indications are that growth is continuing in 2016, though probably at a more moderate pace,” he said. “Labor market indicators have been more mixed of late.”