June 4, 2019 / 5:03 AM / 5 months ago

Australia cuts rates as global central banks move to head off trade shocks

SYDNEY (Reuters) - Australia’s central bank cut rates to a record low on Tuesday and signaled willingness to go further as a worsening Sino-U.S. trade war raises recession risks for the world economy, pushing policymakers into what could be a global monetary easing cycle.

The Reserve Bank of Australia (RBA) lowered rates by a quarter of a percentage point to 1.25%, the first easing in nearly three years. The move comes a day before first-quarter data is expected to show the A$1.9 trillion ($1.33 trillion) economy hitting its weakest annual growth in a decade.

RBA Governor Philip Lowe said the rate cut was designed to support employment growth and lift inflation, which has consistently undershot its 2%-to-3% medium-term target.

And more might be needed. Financial markets see a 50-50 chance of another move to 1.00% next month. Some are also predicting a third cut before the end of the year.

In a speech in Sydney titled ‘Today’s Reduction In The Cash Rate’, Lowe said it was “not unreasonable to expect a lower cash rate.”

“It is possible that the current policy settings will be enough – that we just need to be patient. But it is also possible that the current policy settings will leave us short,” he added.

“Given this, the possibility of lower interest rates remains on the table.”

He also noted increasing downside risks for the global economy stemming from trade disputes.

“Growth in international trade remains weak and the increased uncertainty is affecting investment intentions in a number of countries,” he added.

The Australian dollar gained after the rate decision, which was fully priced in by the market. The Aussie was last up 0.1% at $0.6984 as investors were wagering on larger reductions in U.S. rates over the next year or so.

Australia’s rate cut is the latest in a swing by central banks around the world toward looser monetary policies as the intensifying Sino-U.S. trade war threatens global economic prospects.

“We would concede that, given global trade developments over the past week and the rising possibility of Fed rate cuts, the risk currently appears to be for more than two rate cuts,” Nomura strategist Andrew Ticehurst said of the RBA.

Last month, New Zealand’s central bank cut its benchmark interest rate for the first time in two-and-a-half years in a bid to support a cooling economy and counter global uncertainties.

    South Korea’s central bank last week kept its policy settings unchanged but adopted a more accommodative tone while India is expected to cut rates at its policy meeting on Thursday.

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Australia has not reported a recession since the early 1990s but is now battling falling home prices, rising unemployment, sluggish consumer spending and lukewarm inflation.

Underlining these pressures, data released earlier in the day showed retailers began the second quarter of the year on a gloomy note with April sales falling.

Household consumption has been a major source of worry for the RBA as miserly wage growth and falling home prices eat into spending power in a sector that accounts for 56% of the economy.

In a boost to borrowers, Commonwealth Bank of Australia and National Australia Bank passed on the RBA cut in full.

ANZ Banking Group lowered its mortgage rates only by 18 basis points while Westpac announced 20 basis point cut for owner occupiers and a fatter 35 basis point reduction for investors with interest-only payments.

“A timely boost for households facing cost-of-living pressures,” Treasurer Josh Frydenberg said of the RBA move.

“The benefits to the economy from this rate cut will not be insignificant but it is important that the banks hear the message from the Australian people that they should pass on the benefits of these rate cuts to their customers.”

FILE PHOTO: A goods deliverer walks past the Reserve Bank of Australia Building in Sydney's central business district, May 5, 2016. REUTERS/Jason Reed/File Photo

Earlier, Frydenberg urged the heads of major banks to pass on the rate cut in full.

Lowe reiterated on Tuesday that monetary policy alone will not be enough to boost economic momentum as households were already up to their eyeballs in debt, putting the onus on the newly re-elected coalition government to do its part.

“As a country, we should also be looking at other options to reduce unemployment,” he said. “One option is for fiscal support, including through spending on infrastructure,” he said.

Reporting by Swati Pandey and Wayne Cole; Editing by Sam Holmes & Shri Navaratnam

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