Australia Trims Down Interest Rates and Revises Economic Growth Prediction
In a recent development, the central bank of Australia has decided to decrease its principal lending rates by 25 basis points. Concurrently, it has also revised the yearly economic projection for the nation downwards.
The central bank has now adjusted the economic growth prediction for the year to 1.7% from the previous 2.1%. This alteration has been attributed to a less than anticipated surge in public demand in the early part of the year which is not expected to be compensated for in the remaining months.
Current Financial Snapshot
The key rates of the nation have now been slashed to 3.6%, marking the lowest level since April three years ago, matching the predictions made by financial experts.
The central bank has reported a substantial decrease in inflation since its peak year before last, with sharper interest rates drawing aggregate demand and potential supply towards a more balanced state.
Impact on the Stock Market and Currency
The local stock market index rose by about 0.3% after this announcement, while the Australian dollar saw a decline of 0.15%, being traded at 0.6501 against the US dollar.
The inflation rate in Australia was recorded at 2.1% in the last quarter, its lowest since March of the previous year and close to the lower limit of the central bank's 2%-3% target range.
Global Trade Environment and Its Effects
This reduction in rates comes in the wake of a drastically altered global trade scenario with the implementation of U.S. tariffs and slower than expected economic growth in the first quarter of the year.
Australia was subjected to a standard 10% tariff by the U.S. President, which was surprisingly welcomed by the country's trade minister as a "vindication" for the government's negotiation tactics.
According to the central bank, the threat of a major trade war has lessened and recent international trade policy changes have had minimal noticeable effect on the Australian economy so far. However, they caution that a significant disruption to global trade cannot be completely ruled out.
Lower GDP Growth Due to Reduced Productivity Outlook
The central bank attributes the lower GDP growth forecast more to a diminished outlook for productivity growth, rather than trade disturbances.
The nation's economy expanded by 1.3% year on year in the first quarter, which is lower than the 1.5% growth estimated by financial experts. On a quarter to quarter basis, the economy grew by 0.2% which fell short of the expected 0.4% growth.
The head of national accounts attributed this weak growth to a reduction in public spending, coupled with a decrease in consumer demand and exports.
Future Predictions
Analysts forecast another rate cut towards the end of the year, and they envisage the possibility of yet another one in the early part of the next year.
The head of Asia-Pacific at a major financial firm expects rates to drop to 2.85% by the mid of next year, based on the central bank's revised inflation forecast.