In its meeting on 5 May 2015, the board of the Reserve Bank of Australia decided to lower the cash rate by 25 basis points to 2.0 per cent. The interest rate cut will be effective the following day on 6 May 2015. The RBA cited a moderate expansion of the global economy as insufficient. The decline in commodity prices has been reflected by Australia’s increased supply. The RBA believes that despite the increased supply, the country’s trade is falling. Another factor for the cut that was cited by the RBA was the speculation of an interest rate increase by the Federal Reserve in the US. As the US moves closer to a potential rate increase, countries across the globe are following an opposite trend by lowering interest rates to remain accommodative for sovereigns and creditworthy private borrowers.
The central bank cited some positive aspects of the Australian economy. The information available to the bank suggests an improvement in housing demand trends over the last six months. Stronger growth in employment was also cited. But other factors are dragging on the Australian economy. In particular, private demand will be weakest in business capital expenditure in both mining and non-mining sectors over the coming year. Public spending is also projected to be subdued. “The economy is therefore likely to be operating with a degree of spare capacity for some time yet,” the report said.
Lower interest rates are expected to act as a support for borrowing and spending. Credit is already recording moderate growth overall and recently there has been an uptick in lending to businesses, according to the RBA. The housing market is also a particular point of strength for the economy. Prices for equities and commercial property will benefit from a lower interest rate. The Australian dollar has decline noticeable against the US dollar. The RBA believes further depreciation seems both likely and necessary