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RBA Rate Cut Increases Threat of Deflation
World Economy

RBA Rate Cut Increases Threat of Deflation

The Reserve Bank of Australia has showed it is more worried about deflation than house prices after it cut its official cash rate by a quarter of a percentage point to 1.75%. The RBA’s move contrasts with that of the central bank in New Zealand, which last week kept its official cash rate at 2.25%.

The rate cut sent the Australian dollar sharply lower against the US dollar, bringing with it a spike higher in the NZ/Australian dollar cross rate, Yahoo reported.

By early Sunday evening, the Australian dollar had plunged by 1.4% after the Reserve Bank of Australia slashed its core inflation forecast to 1-2%.

Previously, the RBA forecast a range of 2% to 3%, which is also the official target. Data last week showed Australia’s annual CPI inflation ran at just 1.3% in the March year, well below the RBA’s target range of 2-3%.

The RBA, in Saturday’s statement, said inflationary pressures are lower than expected. At the same time, it said it looked like some of the heat had gone out of the Australian real estate market.

“The outcome showed that they were clearly spooked by that last CPI outcome and they have reacted accordingly,” said Australia & New Zealand Bank’s senior economist Philip Borkin.

“The real estate market has cooled off to a degree and I guess that has given them some comfort that they can use the traditional levers,” he said.

Borkin said the decision showed that central banks were still clearly focused on inflation.

“And if inflation undershoots, they react,” he said.

The statement further said that RBA Governor Glenn Stevens said sentiment in financial markets had improved after a period of heightened volatility early in the year.

“However, uncertainty about the global economic outlook and policy settings among the major jurisdictions continues,” he said.

  Inflation Low

Funding costs for high-quality borrowers remained very low and monetary policy globally had remained accommodative.

“Inflation has been quite low for some time and recent data were unexpectedly low,” Stevens said. “While the quarterly data contain some temporary factors, 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.”

In reaching the decision, the board took careful note of developments in the housing market, where indications were that the effects of supervisory measures strengthening lending standards were starting to have an impact.

Stevens said: “At present, the potential risks of lower interest rates in this area are less than they were a year ago.

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