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How the Reserve Bank of Australia is Fighting Deflation

The threat of deflation is a global story.

The European Union, parts of Scandinavia and Japan now have zero or even negative nominal rates to combat deflation.

Now, Australia's central bank has just cut their cash rate to a record low. The nation's financial authorities have been surprised by weak inflation readings.

Here are details from a May 4 Sydney Morning Herald article:

The Reserve Bank of Australia on [May 3] cut the cash rate to a record low of 1.75 per cent in a bid to head off falling prices and an economic downturn.

The cut, the first in a year, came less than a week after a shock drop in core inflation to well below the central bank's 2 per cent to 3 per cent target band. ...

Deflation in the headline consumer price index, due mainly to falling oil prices and aggressive retailer discounting, was the first such quarterly contraction in seven years.

Moderate inflation, the result of demand for goods and services -- including labour -- just outstripping supply, is usually the mark of a healthy economy.

However, when prices and wages continue to fall, consumers often hold off on buying and companies on investing. Deflation also pushes up the relative burden of debt.

The cash rate is now easily at its lowest level under the current system of monetary policy setting.

You can read the entire article by clicking on the link below:

http://www.smh.com.au/business/federal-budget/reserve-bank-of-australia-cuts-cash-rate-to-fight-deflation-20160502-gokm8a.html