The Reserve Bank of Australia has announced it will cut the official cash rate by 25 basis points in August, to a historically low 1.50%.
The decision comes off the back of the weak growth in the United States reported last Friday, extremely low inflation in Australia and a perceived stabilising in the Melbourne and Sydney property markets.
Economic data coming out of the US shows much slower than expected GDP growth in June. Annual GDP growth in the US economy was just 1.2% in June, which is well below its forecast of 2.6%. The weakened confidence in the US economy has cast doubt on future cash rate increases by the US Federal Reserve and subsequently the USD fell sharply.
In the past, the RBA has referenced a high AUD as being threatening to prosperity in exports and potentially stunting GDP growth more widely. With inflation at just 1% in the year to June, there is also an added incentive to keep the currency down so overseas goods become more expensive and create ‘imported inflation’.
Monetary policy is increasingly being used as a tool to lower the AUD. If the interest rate (or return on the dollar) is low, investors are likely to sell off the Australian dollar creating an oversupply of the currency – thus devaluing it.
Inflation is another persistent pressure that may have led to today’s cut decision (annual inflation is 1%). Though the RBA can ease monetary policy to stimulate spending, the rate cut will be limited in creating demand across the economy without complementary fiscal policy from the government.
Rate cuts appear to have previously stimulated spending in the Sydney and Melbourne property markets, with investment also spilling over to regional NSW, Tasmania and parts of Queensland.