SYDNEY • Australia's central bank cut its cash rate a quarter-point to an all-time low of 1.5 per cent yesterday, the second easing this year as it seeks to defend the economy from creeping deflation and restrain a too-strong currency.
The local dollar did initially retreat on the Reserve Bank of Australia's (RBA) widely expected move. But it quickly rebounded as investors anticipated easings by other central banks, underlining the challenge of keeping the currency down in a world where negative rates are now commonplace.
"The Reserve Bank is clearly on a mission to avoid the near zero inflation rates that many similar countries have," said Mr Shane Oliver, chief economist at AMP Capital Investors.
"With the inflation numbers so low and the risk that if they didn't cut that the Aussie dollar would have been 76-77 (US cents) by now, they felt they probably had to act."
The Aussie was last at 75.68 US cents, having been as low as 74.86 US cents at one stage. That resilience is a major reason the market is already pricing in the possibility of a further rate cut to 1.25 per cent. The Aussie was trading at 1.0148 per Singapore dollar.
RBA Governor Glenn Stevens, who retires next month, was characteristically tight-lipped on the outlook for policy.
"The board judged that prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting," said Mr Stevens, who noted that inflation would likely be low for an extended period.
Data out last week showed consumer price inflation slowed to 17-year lows in the June quarter while underlying inflation hit an all-time trough of 1.5 per cent.
That was well short of the RBA's long-term target band of 2 per cent to 3 per cent, suggesting the economy needed to grow faster if disinflation was not to become the new norm.
The decision led to four of Australia's biggest banks slashing mortgage rates by 10 to 14 basis points yesterday while lifting rates on term deposits. The nation's No. 2 lender Commonwealth Bank was the first to move, with a 13 basis point cut to a record low of 5.22 per cent for owner-occupied homes. It reduced rates for small businesses by a similar amount.
National Australia Bank, the country's biggest lender, followed with a 10 basis point cut. ANZ said it was introducing a 12 basis point cut to its variable rates to take home loans to a historic low, while Westpac said it would bring in a 14 basis point cut to 5.29 per cent.
The four banks said they would boost deposit rates to attract more savings, helping them reduce dependence on offshore markets where borrowing costs have shot up. Australian banks shares slipped by between 0.2 per cent and 0.9 per cent, dragging the benchmark index lower by 0.8 per cent.