RBA cuts rates to 1.25 per cent

The Reserve Bank of Australia (RBA) has cut rates from 1.5 per cent to 1.25 per cent, the first interest rate move in almost three years, in order to control inflation and support employment growth.

The RBA said the decision was taken in order to support employment growth and provide greater confidence that inflation will be consistent with its medium-term target.

Governor Philip Lowe said: “Today's decision to lower the cash rate will help make further inroads into the spare capacity in the economy. It will assist with faster progress in reducing unemployment and achieve more assured progress towards the inflation target.

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“The board will continue to monitor developments in the labour market closely and adjust monetary policy to support sustainable growth in the economy and the achievement of the inflation target over time.”

He said he expected inflation to pick up with underlying inflation forecast to 1.75 per cent this year and two per cent in 2020 while the Australian economy was forecast to grow by around 2.75 per cent in both 2019 and 2020.

Kate Howitt, portfolio manager at Fidelity, said: “Perhaps the most important aspect of today’s move is the signal it sends to markets that the Reserve Bank has moved into dovish territory and will move to support the local economy.  With the US Fed in a rate raising cycle, the RBA has today reinforced that its mandate is to manage the domestic economy, not the Aussie dollar.”

Rafiq Choudhury, senior investment specialist at State Street Global Advisers, said he was “not surprised” by the RBA’s decision.

“As monetary accommodation continues, we find ourselves in a very different rate environment than we were in last year. More moderate growth in 2019 along with a continued lack of inflation (globally), has led to a change in expectations.”

Forecasters were predicting as many as two further cuts this year with rates likely to drop below one per cent by the end of 2019.

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