RBA cuts interest rates 50bp

The Reserve Bank of Australia (RBA) has cut the official cash rate in its May Board meeting today, following weaker than expected inflation data. The Board thought it was prudent to cut the official cash rate 50 basis points to 3.75 per cent, after headline inflation turned out to be significantly lower than the RBA’s target range of 2 to 3 per cent.

The rate cut failed to shock industry analysts, with many forecasting a rate cut last week.   The RBA’s decision was the right one, as the economy was in serious need of a boost. We have seen a lot of softness in the economy of late. House prices are down on where they were, retail activity has slumped and headline inflation was just 1.6 per cent for the year.  There is no doubt the economy is doing it tough at the moment and hopefully this rate cut will help ignite consumer spending once again.

Minutes from the meeting today show the RBA took inflation results onboard was making the rate cut decision. Recent data for inflation show that after a pick up in the first half of last year, underlying inflation has declined again, and was a little over two per cent over the latest four quarters.

In considering the appropriate size of adjustment to the cash rate at today’s meeting, the Board judged it desirable that financial conditions now be easier than those which had prevailed in December. A reduction of 50 basis points in the cash rate was, in this instance, therefore judged to be necessary in order to deliver the appropriate level of borrowing rates.

With the RBA slashing rates, all eyes will now  be on Australia’s lenders to see if they pass on the full rate cut to borrowers.


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