The Reserve Bank has made the unexpected move of cutting the official interest rate by 25 basis points to 2.75%.
The move comes despite economists predicting there wouldn’t be another move until June or July, and frames next week’s federal budget around the prospect of commentary regarding a poor-performing economy.
In a statement, governor Glenn Stevens said the global economy is likely to record growth a little below trend next year, and mentioned that given the drop in resources sector investment, “there is scope for other areas of demand to grow more strongly”.
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“Employment has continued to grow but more slowly than the labour force, so that the rate of unemployment has increased a little, though it remains relatively low.”
Steven said the effects of lower interest rates are starting to seep through the economy, with higher investment returns and asset values.
“The exchange rate, on the other hand, has been little changed at a historically high level over the past 18 months, which is unusual given the decline in export prices and interest rates during that time. Moreover, the demand for credit remains, at this point, relatively subdued.”
Given the inflation outlook, which remains on target, Stevens said there was more scope to ease the current rate.
“At today’s meeting the Board decided to use some of that scope. It judged that a further decline in the cash rate was appropriate to encourage sustainable growth in the economy, consistent with achieving the inflation target.”