Australia Lowers Interest Rates

One of the tools that a central bank (usually) has at its disposal for holding inflation in-check or spurring economic growth is its interest rate policy – of course, many central banks currently lack the ability to boost economic growth by dropping interest rates because they are already at rock-bottom levels.

Australia was the only major economy to avoid falling into a recession during the global financial crisis and the first to reverse the policy of interest rate reductions which had been used as a part of the strategy to foster economic expansion. It fared better than many because the country is rich in raw materials which are in demand in importing markets. However, despite being an island continent, in economic terms, Australia proves the maxim that “no man is an island” and its economy is being hurt by the slowdown in global demand.

In a move that took some by surprise, the Reserve Bank of Australia (RBA) cut its interest rate by a further 0.25% to 3.25%; the first such move since June. The rate remains substantially above central bank rates in the USA, Japan, UK and the ECB, of course. A rate cut will make the Australian Dollar less attractive to currency investors – in theory at least – which should lead it to a lower level against other major currencies. This would be helpful to Australia since it would make its exports cheaper in importing markets, helping their competitiveness.

Commenting on the move in a statement, RBA Governor, Glen Steven noted: "The Board judged that, on the back of international developments, the growth outlook for next year looked a little weaker, while inflation was expected to be consistent with the target. The Board therefore decided that it was appropriate for the stance of monetary policy to be a little more accommodative."