Weak inflation forces RBA's hand

By Tim Stewart
 — 1 minute read

Reserve Bank of Australia governor Glenn Stevens has pointed to "unexpectedly low" inflation data as the reason for yesterday's surprise cash rate cut.

In his statement accompanying yesterday's RBA board decision, Mr Stevens said inflationary pressures are "lower than expected".

The Consumer Price Index rose by 1.3 per cent year-on-year in the March 2016 quarter, leading to movement in the ASX futures market that suggested a rate cut was likely.


"While the quarterly data contain some temporary factors, these results, together with ongoing very subdued growth in labour costs and very low cost pressures elsewhere in the world, point to a lower outlook for inflation than previously forecast," Mr Stevens said.

"Monetary policy has been accommodative for quite some time. Low interest rates have been supporting demand and the lower exchange rate overall has helped the traded sector," he said.

Yesterday's decision also took "careful note" of developments in the housing market, where "indications are that the effects of supervisory measures are strengthening lending standards and that price pressures have tended to abate", he said.

"At present, the potential risks of lower interest rates in this area are less than they were a year ago," Mr Stevens said.

"Taking all these considerations into account, the [RBA] board judged that prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting."

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