Australia Slashes Interest Rate to 2-Year Low of 3.85%

SYDNEY: On Tuesday, Australia's central bank lowered its primary cash rate by 25 basis points to a two-year low of 3.85 per cent, attributing this decision to a dimmer global outlook and slowing domestic inflation, while still exercising caution regarding any further reductions. The Australian dollar decreased by 0.4 per cent to $0.6429, while three-year bond futures increased by 2 ticks to 96.37. Swaps indicate an overall reduction of 57 basis points by year-end. Concluding a two-day policy session, the Reserve Bank of Australia noted that the risks of inflation rising had decreased, while global events were anticipated to impact the domestic economy negatively.

After the recent declaration of substantial U.S. tariffs on imports, markets were entirely positioned for a reduction due to a decrease in domestic inflation and a bleaker international perspective. "The board stated that inflation remains within the target range and the risks of increases seem to have lessened as global events are likely to impact the economy." The board believes that this action will render monetary policy slightly less stringent. It remains cautious regarding the outlook. Headline consumer price inflation remained at 2.4 per cent in the first quarter, while a crucial trimmed mean gauge of core inflation eased to 2.9 per cent, returning it to the RBA's target range of 2 per cent to 3 per cent for the first time since late 2021.

Since the RBA convened in April, the worldwide situation has shifted significantly. U.S. President Donald Trump's trade war worldwide has unsettled financial markets and disrupted business strategies. Trump has enacted a 10 per cent general import tax on all international products, and following a tariff confrontation with China that risked a worldwide recession, both nations consented to reduce excessive taxes on each other’s products for 90 days. Australia is a significant supplier of resources to China, and tariffs on the globe's second-largest economy might impede growth in that nation and its need for commodities like iron ore.

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At home, data trends have been varied, with the expected increase in consumer spending surprisingly weak. The labour market, nonetheless, continued to be unexpectedly robust, with the unemployment rate remaining steady at 4.1 per cent, where it has generally stayed for more than a year. Wage increases accelerated in the first quarter, but this was a result of government salary hikes and should not result in a harmful wage-price spiral. On Tuesday, the RBA indicated that inflation would decrease and unemployment would rise because of the ripple effects of global trade disputes, even if interest rates were reduced as significantly as the markets anticipated.