SYDNEY, Aug. 2 (Xinhua) -- Australia's central bank has cut the official cash rate to a new record low 1.5 percent on Tuesday as inflation "remains quite low" despite the local economy continuing to make the necessary adjustments.
Australia has been toying with low interest rates since 2013 which has been supporting domestic demand and exports, while the banks have been in a position to lend have been assisting the economy to make the necessary adjustments from mining-led growth.
But Reserve Bank of Australia governor Glen Stevens said the subdued growth in labour costs and low cost pressures globally means inflation will remain quite low for some time.
"Taking all these considerations into account, the Board judged that prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting," Stevens said in a statement on Tuesday.
Australia's central bank is navigating a tricky transition away from mining led growth, relying on low rates to weigh on the Australian dollar to make services and agriculture exports more attractive to the Asia-Pacific consumer market.
Though the economy is growing above trend, it's beginning to come under pressure from weak wage growth due to slack in the labour market and the near-30 percent fall in the Australian dollar failing to lift core inflation.
The Australian dollar initially fell to 74.92 U.S. cents on the RBA's announcement, from 75.40 U.S. cents just prior, however by 1449 local time (AEST) traders had shrugged off the decision, with the unit trading at 75.26 U.S. cents.
"If (the RBA) had left rates on hold, it would probably now be on its way to 78 U.S. cents," AMP Capital chief economist Shane Oliver said.
It's been suggested the expected rise in import prices have been absorbed in key supplier markets due to their own deflationary pressures, while the ultra-competitive retail market has also absorbed a chunk of the higher costs in the fight for the consumer dollar.
All this is perpetuating a negative feedback loop for lower prices in the consumer mindset, but questions remain if the RBA is best position to arrest falling inflation expectations as it begins to run out of ammunition.
"Central banks everywhere would like extra stimulus to come from lower currencies and more infrastructure spending," Commonwealth Bank of Australia chief economist Michael Blythe said prior to the RBA release.
"Both are beyond the ability of the RBA to deliver -- they remain the policy maker of last resort."
Australia's central government however are unlikely to come to the table as they undertake much need budget reform to curb growing deficits. The ruling government has said protecting the country's lucrative AAA credit rating is top priority, thus adding to national debt not an option.
Australian economists are now expecting the central bank to cut rates by a further 50 basis points by the end of the first half of 2017.
In preparation, Stevens attempted to ally fears of further stimulus to an already heated property market.
"Supervisory measures have strengthened lending standards in the housing market (and) separately, a number of lenders are also taking a more cautious attitude to lending in certain segments," Stevens said.
House prices have only risen moderately in the past year, while there is still a large supply of apartments scheduled to become available over the next few years, while growth in housing lending has also slowed.
"All this suggests that the likelihood of lower interest rates exacerbating risks in the housing market has diminished," Stevens said.
