The Reserve Bank of Australia has cut the official cash rate to 1.75%, an historic low.
In the accompanying monetary policy statement, the board presented a mixed picture on the state of the Australian economy, with the language towards inflation noticeably more dovish than what was seen in prior months courtesy of last Wednesday’s incredibly low consumer price inflation print.
On inflation, the board stated that recent data was “unexpectedly low”.
“While the quarterly data contain some temporary factors, these results, together with ongoing very subdued growth in labour costs and very low cost pressures elsewhere in the world, point to a lower outlook for inflation than previously forecast,” the statement read.
Beyond the inflation outlook, the tone of the statement expressed a cautious optimism towards the outlook for the domestic economy.
“The available information suggests that the economy is continuing to rebalance following the mining investment boom. GDP growth picked up over 2015, particularly in the second half of the year, and the labour market improved,” the bank said.
“Indications are that growth is continuing in 2016, though probably at a more moderate pace.”
Fitting with labour market data seen so far this year — both the official numbers from the ABS and private gauges such as ANZ job ads and Westpac unemployment expectations — it acknowledged that “labour market indicators have been more mixed of late”.
It also suggested that low interest rates have been supporting domestic demand with the lower Australian dollar assisting Australia’s trade-exposed sectors.
“These factors are all assisting the economy to make the necessary economic adjustments, though an appreciating exchange rate could complicate this,” the bank said.
Along with the lower-than-expected outlook for inflation, the board also expressed confidence that recent regulatory measures introduced by APRA to mitigate risks in the housing market were working.
“The board took careful note of developments in the housing market, where indications are that the effects of supervisory measures are strengthening lending standards and that price pressures have tended to abate,” it said. “At present, the potential risks of lower interest rates in this area are less than they were a year ago.”
As a result, the board suggested that the “prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting”.
Although absent of a clear easing bias — something that indicates further policy easing may arrive in the period ahead — it’s not unusual for the RBA to not provide such guidance in the immediate aftermath of a rate cut.
As a consequence, the most keenly eyed piece of next month’s monetary policy statement will be the final paragraph to see whether the board will retain a clear easing bias.
In response to the rate cut, the Australian dollar has tumbled, falling to as low as .7558 before bouncing in recent trade.
It currently buys .7570, down 1.25% for the session. It briefly traded as high as .7717 before the rate decision was delivered.
Australian stocks have also rallied on the decision with the ASX 200 up 1.35% at 5313.8.
Here’s a link to the RBA’s May policy statement.