The Reserve Bank of Australia has cut interest rates by 25 basis points to 4.5%, warning that recent global economic turmoil could lead to a “period of precautionary behaviour” by businesses.
The rate cut, the first since April 2009, was widely predicted by economists following recent lower-than-expected inflation data.
In its rationale for the rate cut, the RBA said that it was required due to the slowdown in the global economy, including key trading partner China.
The board said that fears of a “major downturn” have not come to fruition, but added: “Trade performance, however, is starting to see some effects of a significant slowing in economic activity in Europe, where the prospects are for economic weakness to continue.”
“It is likely to be some time yet before concerns about the European situation can definitively be laid to rest and the effects of the recent turmoil on confidence may result in a period of precautionary behaviour by firms and households.”
The RBA said that the Australian economy was facing “moderate” growth, although cautious consumers and the strong Australian dollar have dampened spending.
“With overall growth moderate, inflation now likely to be close to target and confidence subdued outside the resources sector, the board concluded that a more neutral stance of monetary policy would now be consistent with achieving sustainable growth and 2–3% inflation over time,” said the board’s statement.
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The Australian Chamber of Commerce and Industry said that the rate cut should aid businesses not in the resources.
“This is only a minor adjustment, but it is the single most positive thing that has happened for many small to medium enterprises in the last twelve months,” said Greg Evans, ACCI’s economics director.
“We would expect the banks will swiftly pass on the full value of the official interest rate reduction to both business and household customers as there is no plausible justification to hold back the required adjustment.”