Business

Australia's central bank cuts rates to historic low

The Reserve Bank of Australia (RBA) has cut its key interest rate by 25 basis points to an all-time low of 2%.

A strong currency and a drop in iron ore prices are among the reasons for the cut.

The cut is the second this year, following a previous 25 basis point cut in February.

The RBA's move follows similar action from central banks in China, Canada, Singapore, Korea and India.

Image copyright Getty Images
Image caption Australia's central bank has been under pressure to cut its lending rates

A rising Australian dollar had also been cause for concern. The currency started to fall against the US dollar on the RBA's announcement.

'Right thing'

"The RBA has done the right thing," said economist Shane Oliver from AMP Capital.

"Sure, surging Sydney house prices are a concern but interest rates need to be set for the national 'average', not just one city," he said.

"And the 'average' is telling us Australia needs lower interest rates: growth is sub par, the business investment outlook is poor, national income is getting hit hard by the falling iron ore price and house price gains outside of Sydney are soft."

The RBA's move also follows worrying official trade numbers released on Tuesday which showed the country's trade deficit had missed expectations in March.

The Australian Bureau of Statistics (ABS) said the deficit had narrowed by a seasonally adjusted 18% to 1.32bn Australian dollars ($1.03bn).

Analysts said the numbers were due in part to falling iron ore and coal exports.

Iron pressure

Australia's central bank had been under pressure to cut its lending rates further this year, particularly amid worrying iron ore prices - which recently fell to decade lows - together with a recent strengthening of the local currency.

Iron ore is Australia's most valuable export and the plummeting prices - attributed to a supply glut and waning demand from China, a key buyer of the product - have been hurting miners' profits, as well as government tax revenue.

Australian Treasurer Joe Hockey said last month that the government would face a multi-billion dollar revenue loss due to a plunge in the price of iron ore.

The government will deliver its 2015-16 budget papers on 12 May and has said it remains committed to achieving a budget surplus.

Analysts said the RBA's move to cut its lending rates would help further lower the Australian dollar, which would in turn help commodity producers exporting products priced in US dollars.

"Further depreciation seems both likely and necessary," RBA Governor Glenn Stevens said, "particularly given the significant declines in key commodity prices."

In March, Australia said its economy grew 2.5% in the fourth quarter of 2014 from a year earlier, marking its slowest pace of annual growth last year.

The economy grew 0.5% in the October to December period from the last quarter, when quarterly growth was 0.4%.

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