Low inflation drives RBA to cut rates again


The Reserve Bank has made its move on interest rates, cutting them to a new record low of 1.75 per cent in its ongoing effort to fight the economic downturn and deflation.

The rate cut came on the same day the Federal Government released the Budget and shortly after a bigger than expected drop in inflation figures.

Economists are divided on whether the RBA has made the right move, and plenty think there’ll be one more cut this year depending on future inflation figures.

The inflation figures were a surprise drop to below the RBA’s target band of 2-3 per cent, with moderate inflation seen to be the sign of a healthy economy.

The official cash rate is now comfortably at its lowest level under the current system of monetary policy setting.

RBA Governor Glenn Stevens confirmed the rate cut was based on the surprising set of inflation figures.

“Inflation has been quite low for some time and recent data were unexpectedly low,” he said in the RBA’s official statement.

“While the quarterly data contain some temporary factors, these results, together with ongoing very subdued growth in labour costs and low cost pressures elsewhere in the world, point to a lower outlook for inflation than previously forecast.”

As for the housing market, Mr Stevens said the softening conditions meant they could cut rates without worrying about it restarting the overheating property conditions in Sydney and Melbourne.

The NAB has already passed the rate cut on in full and their chief economist for markets, Ivan Colhoun, said another cut this year would depend on inflation figures.

“What people will be asking now is if one rate cut would be enough to put them back into that target band, or make them confident about that,” he told The Sydney Morning Herald.

“For now I think there’s nothing in the statement, or in our reading of the economy, which suggests that the economy has weakened dramatically.”


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