1. Australia cuts rates to historic lows to head off deflation

Australia cuts rates to historic lows to head off deflation

Australia's central bank cut its cash rate a quarter point to an all-time low of 1.5 percent on Tuesday, the second easing this year as it seeks to defend the economy from creeping deflation and restrain a too-strong currency.

By: | Published: August 2, 2016 2:28 PM
The Aussie was last at ##IMG-CONTENT##.7528, having been as low as ##IMG-CONTENT##.7486 at one stage. That resilience is a major reason the market is already pricing in the possibility of a further rate cut to 1.25 percent. (Reuters)

The Aussie was last at ##IMG-CONTENT##.7528, having been as low as ##IMG-CONTENT##.7486 at one stage. That resilience is a major reason the market is already pricing in the possibility of a further rate cut to 1.25 percent. (Reuters)

Australia’s central bank cut its cash rate a quarter point to an all-time low of 1.5 percent on Tuesday, the second easing this year as it seeks to defend the economy from creeping deflation and restrain a too-strong currency.

The local dollar did initially retreat on the Reserve Bank of Australia’s (RBA) widely expected move. But it quickly rebounded as investors anticipated easings by other central banks, underlining the challenge of keeping the currency down in a world where negative rates are now commonplace.

“The Reserve Bank is clearly on a mission to avoid the near zero inflation rates that many similar countries have,” said Shane Oliver, chief economist at AMP Capital Investors.

“With the inflation numbers so low and the risk that if they didn’t cut that the Aussie dollar would have been 76-77 (U.S. cents) by now, they felt they probably had to act.”

The Aussie was last at $0.7528, having been as low as $0.7486 at one stage. That resilience is a major reason the market is already pricing in the possibility of a further rate cut to 1.25 percent.

Interbank futures imply a 68 percent probability of a further easing by December <0#YIB:>. Likewise, yields on three-year government debt dropped to 1.39 percent, making it cheaper than borrowing overnight.

RBA Governor Glenn Stevens, who retires next month after a decade at the helm of the central bank, was characteristically tight-lipped on the outlook for policy.

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