At its monthly policy meeting Tuesday the Reserve Bank of Australia (RBA) announced it was cutting its cash rate a quarter point to an all-time low of 1.75 per cent in a move to stave off deflation after data last week showed quarterly deflation in the consumer price index and the weakest annual pace on record for core inflation.
The RBA left the door open for further easing, sending the local currency tumbling and stocks climbing.
The Australian dollar dropped more than a full cent after the rate decision, trading at 75.72 U.S. cents as of 4:08 p.m. in Sydney from as high as 77.19 cents earlier in the day.
The rate reduction was announced just hours before its government submits its budget, setting the scene for Prime Minister Malcolm Turnbull to call a general election.
No Rate Cuts During Election Period
According to Paul Bloxham, chief Australia economist at HSBC Holdings Plc in Sydney who previously worked at the central bank, “Rate cuts will be off the agenda during the election period. However, we expect that this won’t be enough and that the RBA will have to cut again because the downside risk to growth and inflation is significant.”
Reserve Bank of Australia Governor Glenn Stevens isn’t pessimistic on the economy after it expanded 3 percent last year. He said that “Indications are that growth is continuing in 2016, though probably at a more moderate pace,” and that “labor market indicators have been more mixed of late.”