By Avaneesh Pandey -
The Reserve Bank of Australia (RBA) announced Tuesday that it will continue to hold interest rates at a record low of 2 percent. The decision to hold the cash rate steady -- which was widely expected -- comes amid turmoil in the global economy triggered by China’s decision to devalue the yuan last month.
In its statement released Tuesday, the country’s central bank said that Australia’s terms of trade -- the value of a country’s exports relative to its imports -- were falling and that global financial conditions remain “very accommodative.”
“The global economy is expanding at a moderate pace, with some further softening in conditions in China and East Asia of late, but stronger U.S. growth. Key commodity prices are much lower than a year ago, in part reflecting increased supply, including from Australia,” the bank said, in the statement. “In such circumstances, monetary policy needs to be accommodative. Low interest rates are acting to support borrowing and spending.”
Last month’s bloodbath in the Chinese markets triggered massive sell-offs in most Asian economies as jittery investors rushed to get rid of assets perceived as risky. In Australia, the S&P ASX 200 index posted its worst monthly performance since 2008 -- dropping by over 8.5 percent.
The Australian dollar, which recently hit a six-year low -- dropping below 75 U.S. cents -- was trading slightly higher at 71.5 U.S. cents after the central bank announcement. In the statement, the central bank said that the currency is “adjusting to significant declines in key commodity prices.”
The weak Australian dollar and the already-low cost of credit are expected to fuel investment, spending and exports, which have been hit by the slowdown in the Chinese economy and a weakening yuan.
The RBA had last cut rates in May, when it brought the cash rate down by 0.25 percent in response to sharp falls in commodity prices.