SYDNEY • Australia's central bank yesterday cut interest rates to an all-time low of 1.75 per cent, the first easing in a year as it seeks to restrain a rising currency and stave off the creeping curse of deflation.
The Reserve Bank of Australia's (RBA) quarter-point cut sent the local dollar down more than one US cent to US$0.7567 as markets wagered a further move to 1.5 per cent was now likely.
Australia is just the latest in the Asian region to feel the chill of deflation as too many goods chase too little demand. Singapore surprised many by easing last month, after India, Taiwan, Indonesia, China, Japan and New Zealand.
Speculation of a possible cut flared last week when Australian government data showed inflation had slowed far more than expected in the first quarter of the year.
Underlying inflation dropped to a record low of 1.5 per cent, taking it well under the RBA's long-term target band of 2 per cent to 3 per cent and effectively pushing real rates higher.
"Inflation has been quite low for some time and recent data was unexpectedly low," RBA governor Glenn Stevens said in a brief statement after the bank's May policy meeting. "These results, together with ongoing very subdued growth in labour costs and very low cost pressures elsewhere in the world, point to a lower outlook for inflation than previously forecast."
Eight central banks globally have embarked on entirely new stimulus cycles so far this year while the Bank of Japan and European Central Bank have embraced sub-zero rates and expanded their asset-buying campaigns.
All this easing abroad has, in turn, boosted the Australian dollar further than the RBA desired, hurting exports and tourism while pushing down import prices and, hence, inflation.
While Australia is still struggling with the unwinding of a massive mining boom, economic activity has been generally favourable. Growth was a surprisingly brisk 3 per cent last year and unemployment recently fell to a 30-month low of 5.7 per cent.
The RBA had also been reluctant to risk a debt-fuelled bubble in the housing market, though tightened rules on investment lending have led to prices cooling in recent months.
"At present, the potential risks of lower interest rates in this area are less than they were a year ago," Mr Stevens said yesterday, providing another reason to expect further cuts. REUTERS