In an effort to stimulate growth amid concerns over a slowdown in the global economy, the Reserve Bank of Australia (RBA) has reduced interest rates.
The central bank has decreased its key rate from 4.75% to 4.5%, marking its first cut since April 2009.
This decision comes against the backdrop of worries that the ongoing debt crisis in Europe and the deceleration in the US may negatively impact global economic growth.
The RBA expressed its concerns regarding the effects of global uncertainty on the national economy, stating,
“Information about the Australian economy suggests moderate growth overall.”
Additionally, it noted that
“The terms of trade have now peaked and will decline somewhat in the near term.”
Besides facing global challenges, the central bank is also tackling a decline in domestic demand.
While the resources and mining sector in Australia has thrived, other economic areas, like retail sales, have recently experienced a downturn.
The bank commented,
“In other sectors, cautious behaviour by households and the high exchange rate have had a noticeable dampening effect.”
Recent data from the Housing Industry Association indicated that new home sales in Australia hit their lowest point in 11 years as of September.
With global slowdown fears intensifying, analysts suggest that the central bank is increasingly anxious that demand could further decrease.
According to Peter Escho from City Index,
“The RBA’s decision to cut rates by 0.25% is an admission that domestic demand is feeling the pressure.”
He further elaborated,
“Clearly, the RBA is using its toolbox to cushion the impact.”
Although diminishing consumer demand has raised concerns for the central bank, it has also contributed to a slowdown in consumer price growth within the nation.
During a period of economic growth fueled by the resources sector, the RBA consistently emphasized the importance of keeping inflation in check.
The bank stated,
“The subdued demand conditions and the high exchange rate have contained inflation more recently.”
As per the Australian Bureau of Statistics, consumer prices increased by 0.6% from July to September, compared to a 0.9% increase in the prior three months.
The bank anticipates that inflation will remain within its target range of 2% – 3% for 2012 and 2013, as pressures on consumer prices lessen, and labour costs outside the resources sector stabilize.
Analysts noted that the slowdown in consumer price growth has facilitated the bank’s ability to lower borrowing costs.
