RBA cuts interest rates on Melbourne Cup day

While most of Australia was busy watching the Melbourne Cup horse race, the Reserve Bank of Australia (RBA) cut the official cash rate by 0.25%.

The move lowers the official rate to 4.5% and is the first time rates have changed in 12 months, with the last alteration being a rate rise on Melbourne Cup day last year.

Glenn Stevens, governor of the RBA, pointed to concerns lessening about a slow down in Chinese growth and the turmoil in financial markets easing.

“Public spending was prominent in driving aggregate demand for several quarters but this impact is now lessening,” Stevens wrote in a statement. “While there has been a degree of caution in private spending behavior thus far, the rise in the terms of trade, which is now boosting national income very substantially, is likely to lead to stronger private spending over the next couple of years, especially in business investment.”

Stevens also noted that the rise in the exchange rate this year, as a result of high commodity prices, should help contain the pressure on inflation.

“Looking ahead, notwithstanding recent good results on inflation, the risk of inflation rising again over the medium term remains,” he added. “At today’s meeting, the Board concluded that the balance of risks had shifted to the point where an early, modest tightening of monetary policy was prudent.”

The Australian Retailers Association (ARA), an industry lobby group, was quick to welcome the rate cut as a win for retailers.

“The race that stops the nation didn’t stop the RBA from bringing some Christmas cheer to retailers, who now have some well deserved and long-awaited hope over the festive season,” said Russell Zimmerman, executive director of the ARA.

“While retailers still have a long road ahead towards long term economic recovery, this will at least be a short term boost for retailers who were bearing the brunt of the pressures on consumers brought about by mortgage stress, the soaring cost of living, and having to negotiate new taxes into their household budgets,” he continued.

Zimmerman applauded the RBA, claiming it was the right decision and hoped that it would help retailers see more customers walk through the door during the Christmas sales period.

“It’s now up to the banks to pass the interest rate cut on in full to businesses and consumers,”  he added.