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RBA Drops Rates to Historical Low in May
Author: Eliza Owen Source: Onthehouse.com.au
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The Reserve Bank of Australia announced it will cut the cash rate by 25 basis points, to a historically low 2 per cent.
The rate cut was announced amongst a mixed bag of performance in economic indicators.
The RBA held the rate in April in anticipation of the latest unemployment data, which showed unemployment improving, though marginally. The unemployment rate dropped from 6.2 per cent in February to 6.1 percent in March.
Similarly, the participation rate increased by 0.1 percentage point, suggesting the employment rate decreased as a result of people finding work, as opposed to falling out of the labour force.
However, Australia experienced a sluggish GDP growth rate of 2.5 per cent for the year to November, 2014, and a deteriorating balance of trade. These are clear signs that while mining kept the economy buoyant during the GFC, it is now lagging while the rest of the world slowly recovers. Low inflation, sitting below the RBA target band of 1.3 per cent in February, also invited a rate cut.
Strengthening of co妹妹odity prices occurred over April. Crude oil rose sharply in the first quarter of 2015, stabilising around $US52 at the end of March. Exporters of liquefied natural gas could see higher revenue as a result, as the oil price is linked with LNG production. Iron ore rose 25 per cent over April, hovering around $US60 at the end of the month.
The recent rise of the AUD, which closed at US 78 cents yesterday, contributed to the rate cut decision. The strength of the AUD resulted from relatively weak performance in the US, and quantitative easing progra妹妹es weakening the euro and the yen.
Cutting the cash rate will help to mitigate increases in the dollar, because the AUD has a lower rate of return. A strong dollar would otherwise stunt export growth, as well as demand for Australian tourism and education, which are major sources of economic growth in Queensland following divestment from mining.
The blunt nature of the interest rate as an economic stimulant means that a rate cut may contribute to further pressure on house prices |
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