Australia cuts key interest rate to record-low 1.5 percent

The Reserve Bank of Australia has announced it has cut the cash rate by 25 basis points to 1.5 per cent, following its August board meeting.

The Reserve Bank of Australia cut its benchmark interest rate to an all-time low on Tuesday, but judging by the reaction in the Australian dollar, you’d think interest rates were raised.

“The decision was widely, but not universally expected and will not come without some controversy – there is not much fuel left in the rate cut tank”.

The New Zealand dollar gained as concerns about the strength of the U.S. economy weighed on the greenback, eroding optimism a rate cut by the Reserve Bank will do much to drag down the kiwi.

Treasurer Scott Morrison denied that the cut was a sign of a struggling economy, saying that Australia was posting 3.1-percent growth, while Stevens said it was unlikely to overheat the housing market.

“Commodity prices are above recent lows, but this follows very substantial declines over the past couple of years”.

“Recent data confirm that inflation remains quite low”. Even though policymakers in China have been implementing policies to speed up the growth, the economy has been showing a moderate increase.

“This reduction of interest rates will allow consumers greater access to discretionary cash, which we anticipate will result in Australians returning to stores”.

However, the governor’s optimism was not shared by many economists who said the RBA had to cut rates because global economic conditions are catching up with Australia.

The four banks said they would boost deposit rates to attract more savings, helping them reduce dependence on offshore markets where borrowing costs have shot up.

“All this suggests that the likelihood of lower interest rates exacerbating risks in the housing market has diminished”, Stevens said.

Leading Australian economist, Bill Evans of Westpac Bank, said the RBA was expected to sit on the sidelines and observe the next few growth and inflation readings before acting again, with uncertainty about the global economic environment also a key factor.

Commonwealth Bank was quick to trim its variable mortgage rate to 5.22 per cent, though a raft of special offers mean it is fairly easy to pay less than 5 per cent.

After the RBA made its decision, the Australia dollar has fallen by 0.16%, and is now buying 75.24 USA cents.

The rate has broken above the median line (ML) of the ascending pitchfork, has managed to pass through the first warning line (wl1) of the previous descending pitchfork and could could climb to reach the 50% Fibonacci line, where he could find temporary resistance.