The Reserve Bank of Australia (RBA) has cut the official cash rate to a historic low of 1.5 per cent in its monthly board meeting, a move widely predicted by economists.
The decision to cut the cash rate by 25 basis points came after July’s inflation figures showed the annual CPI growing at just 1 per cent. Underlying or “core” inflation has now been below 2 per cent since September last year and actual CPI has not been above 2 per cent since September 2014.
The latest move comes after official figures show worse than expected figures on building approvals. Approvals for the construction of new homes fell 2.9 per cent in June, which was worse than market expectations on a 0.5 per cent rise. Australian bond yields have dropped to record lows and have extended their falls after the announcement.
The Australian dollar dropped below US 75 cents very briefly after the announcement before last fetching around US 75.1 cents. The cut has pushed the ASX 200 up around 25 points.
The Reserve Bank believes the risk of exacerbating problems in the housing market with further interest rate cuts has diminished.
The move puts Australia less than two more cuts away from what the Reserve Bank have called the “zero bound”, or limit, of traditional monetary policy. Once the cash rate falls below 1 per cent the Reserve Bank may consider unconventional policies such as quantitative easing to add more stimulus to the economy.