The Reserve Bank of Australia (RBA) has signalled it is taking a careful approach to monetary policy after delivering a 25 basis point cut in interest rates.
The decision was consistent with financial market expectations that the central bank would lower the official cash rate to 3.85%.
In a statement after a two day meeting, the RBA’s Monetary Policy Board said although the cut would make monetary policy somewhat less restrictive, it remained cautious about the outlook, particularly given the heightened level of uncertainty about aggregate demand and supply.
The Board said it considered a severe downside scenario and noted monetary policy was well placed to respond decisively to international developments if they were to have material implications for activity and inflation in Australia.
“The Board will be attentive to the data and the evolving assessment of risks to guide its decisions,” the RBA Board said in a statement.
“In doing so, it will pay close attention to developments in the global economy and financial markets, trends in domestic demand, and the outlook for inflation and the labour market.
“The Board is focused on its mandate to deliver price stability and full employment and will do what it considers necessary to achieve that outcome.
“It nevertheless remains cautious about the outlook, particularly given the heightened level of uncertainty about both aggregate demand and supply.”
Although RBA staff were forecasting that headline inflation was likely to rise over the coming year to near top of the band as temporary factors unwound, underlying inflation was expected to be around the midpoint of the 2–3% range through much of the forecast period.
The Board said it judged the risks to inflation had become more balanced.
“Inflation is in the target band and upside risks appear to have diminished as international developments are expected to weigh on the economy,” it said.
“With inflation expected to remain around target, the Board therefore judged that an easing in monetary policy at this meeting was appropriate.”
