Australia’s Central Bank Cuts Interest Rates

By Stella Qiu and Wayne Cole

SYDNEY (Reuters) – Australia’s central bank cut interest rates on Tuesday for a third time this year, signaling that further policy easing might be necessary to achieve its inflation and employment goals as the economy shows signs of losing momentum.

Wrapping up a two-day policy meeting, the Reserve Bank of Australia (RBA) board reduced the main cash rate by a quarter point to 3.6%. They indicated that data suggested core inflation would moderate to around the middle of its 2% to 3% target band, assuming a gradual easing in policy.

Market expectations had been geared towards a cut after the bank’s earlier decision to hold steady in July, as inflation eased in the second quarter despite a rise in unemployment.

Governor Michele Bullock refrained from commenting on whether a cash rate of 3.6% was restrictive but noted that policymakers will evaluate decisions on a meeting-by-meeting basis to meet the objectives of low and stable inflation and full employment. “Forecasts imply that the cash rate might need to be a bit lower than it is today to keep inflation low and stable and employment growing but there is still a lot of uncertainty,” Bullock mentioned after the meeting.

She also emphasized that not cutting rates during Tuesday’s meeting would have put the bank at risk of missing both of its mandates.

The Australian dollar dipped 0.2% to $0.6508, while three-year bonds saw a slight increase to 96.62. Markets show a mere 34% probability of subsequent cuts in September, with expectations of two more rate cuts by early next year priced in at 3.1%.

The RBA previously surprised markets by maintaining rates at 3.85% in a rare split decision while awaiting more data confirming that inflation was easing toward the midpoint of their target range.

The RBA also reduced its economic growth outlook, noting persistent weakness in productivity, while forecasting a slowdown in core inflation amid a stable labor market. Headline inflation fell to 2.1% in the June quarter, while the trimmed mean core inflation reached a three-year low at 2.7%. The jobless rate rose to 4.3% from 4.1% over the course of a month.

Signs indicate that earlier cuts in February and May are beginning to impact the economy positively, as consumer spending picks up due to lower inflation and previous tax cuts. The central bank has taken a cautious approach to easing, having only cut rates after the release of quarterly inflation data, prompting investors to anticipate cuts in November and another in February next year.

In the broader global context, there appears to be slight improvement; recently, U.S. President Donald Trump extended a tariff truce with China for another 90 days, averting further escalation in the trade war.

Harry Murphy Cruise, head of economic research and global trade at Oxford Economics Australia, commented, “Unemployment has jumped, strengthening the case for cuts. At the same time, robust household spending shows some families can still find room for discretionary purchases. In the end, prices and jobs trump everything else. With good news on inflation and bad news on unemployment, more easing is warranted.”,