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RBA lowers cash rate to 2.0%

RBA lowers cash rate to 2.0%

(6 May 2015 – Australia)  The sharp decline in commodity prices along with Australia’s falling terms of trade were at the top of reasons the Reserve Bank of Australia (RBA) Board decided to lower the cash rate by 25 basis points to 2.0 percent at its May Monetary Policy Decision.

While improved trends in household demand over the past six months and stronger growth in employment weighed on the decision, the statement released by RBA governor Glenn Stevens said there was likely to be a drag on private demand and weakness in business capital expenditure over the coming year.

“The economy is therefore likely to be operating with a degree of spare capacity for some time yet,” said Stevens.

 Inflation is forecast to remain consistent with the target over the next one to two years, even with a lower exchange rate.

The statement said low interest rates are acting to support borrowing and spending, and credit is recording moderate growth overall, with stronger lending to businesses of late.

Growth in lending to the housing market has been steady over recent months.

 Dwelling prices continue to rise strongly in Sydney, though trends have been more varied in a number of other cities.

The RBA is working with other regulators to assess and contain risks that may arise from the housing market.

In other asset markets, prices for equities and commercial property have been supported by lower long-term interest rates.

The declining Australian dollar also had an effect and the RBA is expecting further depreciation, particularly given the significant declines in key commodity prices.

“The global economy is expanding at a moderate pace, but commodity prices have declined over the past year, in some cases sharply. These trends appear largely to reflect increased supply, including from Australia.

“Australia's terms of trade are falling nonetheless.

The Federal Reserve is expected to start increasing its policy rate later this year, but some other major central banks are stepping up the pace of unconventional policy measures.

“Hence, financial conditions remain very accommodative globally, with long-term borrowing rates for sovereigns and creditworthy private borrowers remarkably low,” Stevens said.

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