Australian’s are breathing a sigh of relief after the Reserve Bank of Australia announced a reduction in interest rates overnight.
A statement released by RBA governor Glenn Stevens noted the reasons for the rate cut included the unstable global economy and the dramatic drop in the price of iron ore.
While economists were predicting improvement across the globe in August, the RBA has referred to Europe’s contracting position, the modest growth in the US and recent indicators in which China has been weaker, adding “uncertainty to near-term growthâ€.
The RBA is also concerned about “sharp falls in some commodity prices of importance to Australia” including iron ore after its value slipped from $US135 a tonne in July to about $US89 last night.
Back home, economists were looking at the growth in consumer spending in recent months to predict the RBA’s movements. While the figures showed spending was improving, the RBA said they were unlikely to impede a rate cut as the strength may have been temporarily caused by bonus payments which ended in July.
The Reserve Bank believes the inflation outlook gives it room to cut interest rates should resource prices stay low or keep falling as international conditions worsen.
The RBA won’t wait until its board meeting on Melbourne Cup Day to introduce the rate cut and has signalled its new bias towards an easing on October 2.