(Bloomberg) -- Australia cut interest rates for the first time in almost three years to guard against a darkening global backdrop and attempt to revive slowing inflation and economic growth at home.
Reserve Bank Governor Philip Lowe made his first adjustment to the cash rate since taking the helm in September 2016, cutting by a quarter-point to 1.25% Tuesday as expected by money markets and economists. They also see the central bank following up with another cut within three months.
“Today’s decision to lower the cash rate will help make further inroads into the spare capacity in the economy,” Lowe said in his post-meeting statement. “It will assist with faster progress in reducing unemployment and achieve more assured progress towards the inflation target.” The governor didn’t provide any new forward guidance.
Lowe’s (NYSE:LOW) cut comes against the backdrop of an intensifying trade dispute between the world’s economic superpowers and signs of weakness emerging in Australia’s previously roaring jobs market. The economy slowed in recent quarters as tumbling property prices -- led by a 15% fall in Sydney -- left households feeling poorer and weighed on consumer spending.
“The main domestic uncertainty continues to be the outlook for household consumption, which is being affected by a protracted period of low income growth and declining housing prices,” Lowe said. “Some pick-up in growth in household disposable income is expected and this should support consumption.”
The Australian dollar rose, buying 69.92 U.S. cents at 2:35 p.m. in Sydney compared with 69.75 cents before the decision.
Still, an easing of lending rules combined with the well-flagged prospect of rate cuts may have encouraged buyers back into the housing market, where price falls are slowing. Along with a boost of confidence from Prime Minister Scott Morrison’s center-right government’s surprise re-election last month -- on a platform of tax cuts -- the short-term prospects look brighter.
But structural problems remain. Data out Wednesday is likely to show GDP rose an annual 1.8% in the first three months of this year, almost a percentage point below the economy’s speed limit. The central bank needs growth of more than 2.75% in order to soak up spare capacity and drive down unemployment.
The RBA is betting that if the jobless rate grinds lower, workers will eventually be emboldened to ask for larger pay rises and price pressures will then flow through to inflation. Price growth has largely stayed below the bottom of the central bank’s target inflation range of 2-3% for the past five years.
More worryingly, a report Monday showed an 8.4% slump in job advertisements, which suggests the RBA might need to work on reviving the labor market before it can make headway on lowering unemployment.
