Tuesday, the Reserve Bank of Australia slashed the cash rate unexpectedly by a 25 basis points to a 49-year low to support the shrinking economy.
The RBA decided to lower the cash rate to 3%, effective April 8. Economists had expected the central bank to hold the key interest rate at 3.25%. The central bank has reduced the cash rate by 125 basis points since December 2008 and the official cash rate now stands at its lowest level in 49 years.
The RBA noted that the Australian economy is contracting, but less than those of its trading partners. Capacity utilization also started to fall from its peak and would continue to decline over the rest of the year.
With easing demand for labor, labor cost growth is expected to fall. RBA Governor Glenn Stevens said inflation over the medium term is likely to be lower than it has been over the last two years. Though credit for owner-occupied housing is picking up, demand for credit is weak. The fall in cash rates improved household cash flows as well as housing affordability for people paying mortgages.
The Board judged that there was scope for a further modest adjustment to the cash rate. The stance of monetary policy, together with the substantial fiscal initiatives, will provide significant support to domestic demand over the period ahead, the central bank stated.
The minutes of the April Monetary Policy Meeting of the Reserve Bank Board are due on April 21.
On April 6, Treasurer Wayne Swan said Australia's commercial banks need to pass on to their customers any future interest rate cut by the central bank. We do acknowledge there's a complex set of factors out there and funding costs have been bouncing around, Swan said.
The Australian economy contracted 0.5% sequentially in the last quarter of 2008. The statistical office is scheduled to release the National Accounts report for the March quarter on June 3.
Deputy Governor Ric Battellino on March 31 said, the Australian economy has also weakened, while it has held up better up than most during difficult period. However, there are limits on how much we can insulate ourselves from what is happening abroad, and therefore there are probably still some difficult times ahead.
Today, the Rudd Government announced the establishment of a new company to build and operate a new super fast National Broadband Network. The new super fast National Broadband Network which is to be built with private partnership will be the single largest nation building infrastructure project in Australia, the Treasurer said.
The new network will connect 90% of all Australian homes, schools and workplaces with broadband services and will also join all other premises in Australia with next generation wireless and satellite technologies.
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