AU: RBA Announcement

August 1, 2016 11:30 CDT

Consensus Actual Previous
Change -25bp -25bp 0bp
Level 1.50% 1.50% 1.75%

As expected the Reserve Bank of Australia lowered its key interest rate by 25 basis points to 1.5 percent. In his last statement as chair, Glenn Stevens said that the easing will help prospects for the economy and inflation to return to target. The low rate risk to the housing market has diminished. China's growth appears to be moderating but policy actions are supporting near term growth outlook.

Financial markets have continued to function effecting. Recent data suggest that overall growth is continuing at a moderate pace despite a very large decline in business investment. Labour market indicators continue to be somewhat mixed, but are consistent with a modest pace of expansion in employment in the near term.

Sluggish inflation appears to be the major factor influencing the decision to take rates lower. The RBA has an inflation target range of between 2 and 3 percent but last week the quarterly inflation report showed that core inflation a blend of the trimmed mean and weighted median calculations was up 1.5 percent on the year for the three months to June.

The central bank of Australia announces its monetary policy with regard to interest rates on the first Tuesday of each month with the exception of January.

The Reserve Bank of Australia's (RBA's) main responsibility is monetary policy. Policy decisions are made by the Reserve Bank Board with the objective of achieving low and stable inflation over the medium term. Other responsibilities include maintaining financial system stability, while at the same time promoting the safety and efficiency of the payments system. The RBA regards appropriate monetary policy as a major factor contributing to the Australian dollar's stability, which in turn leads to full employment and the economic prosperity for Australia.

The RBA is unique among the central banks - it has two boards with complementary responsibilities. The Reserve Bank Board is responsible for monetary policy and overall financial system stability. The Payments System Board has specific responsibility for the safety and efficiency of the payments system.

The RBA sets an interest rate at which it lends to financial institutions. This interest rate then affects the whole range of interest rates set by commercial banks and other institutions for their own savers and borrowers. It also tends to affect the price of financial assets, such as bonds and shares, and the exchange rate, which affect consumer and business demand in a variety of ways. Lowering or raising interest rates affects spending in the economy.

The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the financial markets, while lower interest rates are bullish.