RBA cuts interest rate by 25 basis points to 4.5%

The Reserve Bank has cut the official interest rate by 25 basis points to 4.5%, with the board saying it was confident in setting monetary policy at a more “neutral” stance.

The move was in line with economists’ expectations, many of whom pointed out that lower than expected inflation figures last week gave the RBA ample room to cut rates.

The board said its decision was based on information showing a moderation in the pace of global growth, with Chinese growth slowing as well.

“Information about the Australian economy suggests moderate growth overall. The terms of trade have now peaked and will decline somewhat in the near term, but they remain very high.”

“In response, investment in the resources sector is picking up very strongly, with much more to come. Some related service sectors are enjoying better-than-average conditions. In other sectors, cautious behaviour by households and the high exchange rate have had a noticeable dampening effect. The unemployment rate has increased a little over recent months, though it remains close to 5%”

While the RBA noted that underlying inflation picked up earlier this year, it has now remained subdued, with confidence outside the resources sector down as well.

“But overall conditions have remained tighter than normal, with borrowing rates still a little higher than average, credit growth subdued and asset prices lower than earlier in the year. The exchange rate has been very variable over the past few months, but on the whole has remained at historically high levels.”

Over the year, it said, the Board has maintained a mildly restrictive stance for monetary policy, but with inflation so low and confidence down as well, a more neutral policy is needed.

The move is likely to be welcomed by retailers and the property industry, both of which argue an interest rate cut will boost confidence ahead of Christmas and ensure stronger sales.