The Reserve Bank of Australia has slashed the official interest rate to a new historic low of 1.75 per cent to boost spending and investment following last week’s drop in inflation.
The decision to lower the interest rate follows data released by the Australian Bureau of Statistics that saw deflation for the first time in seven years in the first quarter. This is the first change in rates since May 2015 with interest rates on hold at 2 per cent.
Falling petrol, food and clothing prices pushed the consumer price index (CPI) 0.2 per cent lower in the first quarter taking annual inflation to 1.3 per cent, well below the Reserve Bank’s target band of 2-3 per cent.
The most significant fall for the quarter occurred in transport which was due to automotive fuel falling for the third consecutive quarter. The second most significant contributor was recreation and culture, with falls in both international and domestic holiday travel and accommodation. Food and non-alcoholic beverages also fell in the March quarter, with fruit providing the most significant contribution.
These falls were partially offset by rises in secondary education, medical and hospital services and pharmaceutical products. Drops in prices discourage spending and investment as both consumers and businesses hold off.