Australia Cuts Key Interest Rate to All-Time Low of 2%
Australia’s central bank (the Reserve Bank of Australia) has cut its key interest rate by 25 basis points to a historic low of 2%.
Rising property prices in Australia’s biggest city, Sydney, a strong currency and a drop in iron ore prices are among the reasons for the cut.
The cut is the second in 2015, following a previous 25 basis point cut in February.
The RBA’s move follows similar action from central banks in China, Canada, Singapore, Korea and India.
A rising Australian dollar had also been cause for concern. The currency started to fall against the US dollar on the RBA’s announcement.
The RBA’s move also follows worrying official trade numbers released on May 5th which showed Australia’s trade deficit had missed expectations in March.
According to the Australian Bureau of Statistics (ABS), the deficit had narrowed by a seasonally adjusted 18% to 1.32 billion Australian dollars ($1.03 billion).
Analysts said the numbers were due in part to falling iron ore and coal exports.
The RBA had been under pressure to cut its lending rates further this year, particularly amid worrying iron ore prices – which recently fell to decade lows – together with a recent strengthening of the local currency.
Iron ore is Australia’s most valuable export and the plummeting prices – attributed to a supply glut and waning demand from China, a key buyer of the product – have been hurting miners’ profits, as well as government tax revenue.
Australian Treasurer Joe Hockey said last month that the government would face a multi-billion dollar revenue loss due to a plunge in the price of iron ore.
The government will deliver its 2015-2016 budget papers on May 12 and has said it remains committed to achieving a budget surplus.
Analysts said the RBA’s move to cut its lending rates would help further lower the Australian dollar, which would in turn help commodity producers exporting products priced in US dollars.
“Further depreciation seems both likely and necessary,” RBA Governor Glenn Stevens said, “particularly given the significant declines in key commodity prices.”
In March, Australia said its economy grew 2.5% in Q4 2014 from a year earlier, marking its slowest pace of annual growth last year.