The Reserve Bank of Australia cut its benchmark interest rate by half a percentage point as inflation pressures abate, delivering a bigger-than-forecast reduction that sent the local dollar and bond yields tumbling.
Governor Glenn Stevens and his board slashed the overnight cash rate target to a two-year low of 3.75 percent from 4.25 percent, the deepest reduction in three years, the central bank said in a statement in Sydney today. Two of 29 economists surveyed by Bloomberg News predicted the move, while the other 27 forecast a quarter-point reduction.
The half-point cut was “judged to be necessary in order to deliver the appropriate level of borrowing rates,” Stevens said in the statement. In the next year or two, “inflation will probably be lower than earlier expected” and within the RBA’s target range of 2 percent to 3 percent, he said.
Australia’s economy is struggling to accelerate, with government reports in the past month showing core inflation slowed to a 13-year low, export and house prices slumped, and consumer confidence weakened. With the first rate cut of the year, Stevens is easing monetary policy a week before the government delivers a budget that aims to end four years of deficits by cutting government spending the equivalent of about 2.5 percent of gross domestic product.