The Reserve Bank of Australia cut interest rates to record lows for the second time this year, as policymakers look to relax monetary policy even further despite signs of an improving economy.
The RBA reduced its target for the overnight rate to a new record low of 2 percent, down from 2.25 percent. The decision to cut interest rates for the second time this year was in line with economists’ forecast.
“At today’s meeting, the Board judged that the inflation outlook provided the opportunity for monetary policy to be eased further, so as to reinforce recent encouraging trends in household demand,” read the official rate statement.
Prior to 2015, the RBA had kept interest rates locked at 2.5 percent for 18 consecutive months, with 2014 marking the first calendar year in a decade the RBA made no changes to monetary policy.
The Bank’s decision to ease monetary policy further likely stems from Australia’s struggle to shift away from its traditional mining and natural resource investment, which helped power the economy for many years. The appreciation of the Australian dollar over the past several years has also placed pressure on the country’s tourism and education sectors. In response, the RBA has successfully “talked down” the Australian dollar over the past year in an attempt to rev up the local economy.
Non-mining activity is forecast to remain sluggish over the course of the year, giving the RBA plenty of scope in keeping policy highly accommodative. Cheap commodity prices and a volatile labour market have also added to Australia’s growing list of economic woes. However, a red hot housing market is stoking fears that record low interest rates could fan the flames of Sydney’s housing boom, which many fear is unsustainable. House prices in Sydney are surging more than 10 percent year-over-year.
In economic data, Australia’s trade deficit narrowed less than forecast in March, as exports and imports each declined by 2 percent. The country’s trade deficit fell to $1.322 billion in March from $1.609 million the previous month, the Australian Bureau of Statistics reported on Tuesday. Economist forecast a trade deficit of $1 billion.