Reserve Bank of Australia cuts official cash rate to record low 2% at May meeting

 The Reserve Bank of Australia on Tuesday cut the cash rate to a new record low of 2 per cent, citing some ongoing economic weakness for its decision.

The widely-expected quarter-point reduction, the second in three months, takes lending rates to the lowest point since at least the late 1950s.

The Australian dollar immediately reacted, plunging more than US0.30¢ to US78.20¢.

RBA governor Glenn Stevens. Photo: Christopher Pearce

However, it quickly recovered to above the day's high - to US78.84¢ - as details emerged of why the board voted to cut rates.

RBA governor Glenn Stevens said  the decision came despite some "improved trends in household demand over the past six months and stronger growth in employment".

However, he added: "Looking ahead, the key drag on private demand is likely to be weakness in business capital expenditure in both the mining and non-mining sectors over the coming year.

"Public spending is also scheduled to be subdued.

"The economy is therefore likely to be operating with a degree of spare capacity for some time yet."

The latest round of rate cuts, which began with February's drop to 2.25 per cent, is aimed at spurring business investment outside mining and encouraging the so-called "animal spirits" which create jobs and drive innovation.

However, it could also further fan the flames of the hot Sydney property market and run the risk of creating a bubble. 

Tuesday's cut comes just days ahead of the RBA's quarterly statement on monetary policy, in which the bank will detail prevailing weaknesses in the Australian economy such as low commodity prices, the fall-off in capital investment, restraints on fiscal spending and relatively high unemployment. 

The central bank, however, appeared to move away from its easing bias, suggesting this might be the last cut in the current cycle.

The above is an abstract from http://www.theage.com.au/business/the-economy/reserve-bank-of-australia-cuts-official-cash-rate-to-record-low-2-at-may-meeting-20150505-ggueak.html

Caroline He

Four C Realty