RBA Rate cut MAY 2016

Posted Tuesday, 03 May 2016 at 14:50 by Shape Home Loans
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The Reserve Bank of Australia interest rate annoucement

The Reserve Bank of Australia has delivered its decision from its monthly board meeting.

The Reserve Bank of Australia has announced it will cut the official cash rate by 25 basis points to 1.75% in May, making this the first cash rate cut since May 2015.

The decision was a tough call amid lower than expected inflation, low consumer sentiment and a downward trend in house price growth. Until inflation was reported on the 27th of April many expected the cash rate to be held steady. Inflation – the rate at which the price of goods and services increases – was just 1.3% in the year to March, which is well below expectations of 1.7%. The monthly inflation result showed that prices actually declined across the country by 0.2%.

Reports of falling prices instantly fuelled market expectations of an interest rate cut. This is because when inflation is low or falling (falling inflation is also known as deflation), central banks tend to lower interest rates to encourage borrowing and spending, thus pushing up inflation. Central banks have an ‘inflation target’ where interest rates are used to keep inflation between 2 to 3% per year. Market expectations of a cash rate cut were indicated by the Australian Dollar (AUD), which instantly dropped in response to the news of low inflation, as shown in Graph 1. This is because investors may have assumed that the low inflation would prompt the RBA to drop rates.

Source: http://www.rba.gov.au/