Two things to note about Australia’s benchmark interest rate falling to 1.5 per cent

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Australian Economy, Uncategorized

 

With the Reserve Bank of Australia (RBA) cutting the official interest rate by 25-basis-point from 1.75 per cent to an all-time low of 1.5 per cent, the Australian share market suffered a slight jolt. The move, which was as expected and is effective August 03, 2016, comes at the back of RBA’s efforts to boost Australian economic growth. Two key things to note entail:

rba.png

Cash Rate (Source: Reserve Bank of Australia)

RBA’s view on Inflation and Australia’s economic health: RBA governor Glenn Stevens highlighted that Australia’s inflation remains quite low (at a 17-year low level as per recent data). Australia’s terms of trade also remain below the recent years’ trend. The growth is continuing at a moderate pace while the business investment has declined. On the other hand, other areas of domestic demand and exports are witnessing expansion at a better pace. Mixed results have been seen for the labour market with a modest pace of expansion in employment in the near term. As per RBA, low interest rates seem to support the domestic demand and the lower exchange rate is also helping the traded sector. Further, dwelling prices were reported to rise only moderately over the course of the year while there has been sluggishness in growth in lending for housing. Accordingly, RBA stated that the likelihood of lower interest rates exacerbating risks in the housing market has diminished. Overall, the above factors led the RBA decide for easing the monetary policy in order to enable inflation returning to target over time.

Glenn Stevens further stated that the global economy is continuing to grow at a lower than average pace. In addition, China’s growth appears to be moderating while there are some near-term growth prospects, and a number of emerging market economies are facing headwinds.

Rate cut by Banks: On the other hand, there are reports that banks have not been successful in passing the rate cut entirely to home loan customers. The customers might receive only a part of the official rate cut as seen for Commonwealth Bank (CBA) and National Australia Bank (NAB), particularly. CBA is set to cut standard variable interest rates for mortgages by 0.13 percentage points and NAB is cutting the same by 0.10 percentage points. This comes at the back of higher costs coupled with strict regulations being challenges highlighted by the two banks. On the other hand, CBA is set to pass on a rate increase of at least 50 basis points for new one, two and three-year term deposits while NAB is reported to offer 0.85 percentage point increase for new eight-month term deposits.


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