The Reserve Bank Australia (RBA) decided to lower the cash rate by 25 basis points to 2.25 per cent, the first movement in the last 18 months.

This decision was primarily prompted by economic growth in Australia continuing at a below-trend pace, with domestic demand growth overall quite weak. Overall, the Bank’s assessment is that output growth will probably remain a little below trend for somewhat longer, and the rate of unemployment peak a little higher, than earlier expected. The economy is likely to be operating with a degree of spare capacity for some time yet.

The price of oil in particular has fallen significantly over the past few months. These trends appear to reflect a combination of lower growth in demand and, more importantly, significant increases in supply. The much lower levels of energy prices will act to strengthen global output and temporarily to lower CPI inflation rates.

The CPI recorded the lowest increase for several years in 2014. This was affected by the sharp decline in oil prices at the end of the year and the removal of the price on carbon. Measures of underlying inflation also declined a little, to around 2¼ per cent over the year.

Credit growth picked up to moderate rates in 2014, with stronger growth in lending to investors in housing assets. The Bank is working with other regulators to assess and contain economic risks that may arise from the housing market.

The Australian dollar has declined noticeably against a rising US dollar over recent months, though less so against a basket of currencies. It remains above most estimates of its fundamental value, particularly given the significant declines in key commodity prices. A lower exchange rate is likely to be needed to achieve balanced growth in the economy.

Given this situation the RBA decided to add stimulus to the Australian economy by reducing the cash rate to historical lows, effective February 4th.