- Glenn Stevens, RBA Governor
The Reserve Bank of Australia surprised economists by slashing interest rates to a new historic low in a bid to reignite inflationary pressures. The central bank cut the official cash rate by 25 basis points to 1.75%, after keeping rates on hold for a year. The decision came after the Australian Bureau of Statistics released quarterly CPI data, showing headline inflation plunged from 1.7% in the final quarter of 2015 to 1.3% last quarter. Worrisome though, was that all three gauges of underlying inflation came in below the RBA's 2-3% target range in the reported period, with two of the three core measures hitting their record low. RBA Governor Glenn Stevens also added that softening conditions in what was an overheated housing market allowed the central bank to cut without fear of fuelling unsustainable price growth.
While Australia's inflation outlook appears to be darkening, the country's broader economic health have been steadily improving for some time. The economy is continuing to rebalance following the mining investment boom, according to the RBA's cash rate statement. Low interest rates have been supporting demand and the lower exchange rate overall has helped the traded sector. Yet, Stevens reiterated the Australian Dollar's strength "could complicate" the necessary adjustment in the economy. The Aussie has gained around 12% against the US Dollar since mid January, further dampening the inflation outlook and hurting exporters.
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