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Australia Unexpectedly Cuts Key Rate by Half Point

RBA’s Rates Isolation Ending in Record Rally
The central business district is seen illuminated at dawn alongside the Harbor Bridge in Sydney. Growth in Australia, the only major developed economy to avoid a recession over the past 20 years, is weakening as output slows in China, its biggest export market. Photographer: Ian Waldie/Bloomberg

The Reserve Bank of Australia cut its benchmark interest rate by half a percentage point as inflation pressures abate, delivering a bigger-than-forecast reduction that sent the local dollar and bond yields tumbling.

Governor Glenn Stevens and his board slashed the overnight cash rate target to a two-year low of 3.75 percent from 4.25 percent, the deepest reduction in three years, according to a central bank statement in Sydney today. Two of 29 economists surveyed by Bloomberg News predicted the move, while the other 27 forecast a quarter-point reduction.

The half-point cut was “judged to be necessary in order to deliver the appropriate level of borrowing rates,” Stevens said in the statement. In the next year or two, “inflation will probably be lower than earlier expected” and within the RBA’s target range of 2 percent to 3 percent, he said.

With his first rate cut of the year, Stevens is easing monetary policy a week before the government delivers a budget that aims to end four years of deficits by cutting government spending by the equivalent of about 2.5 percent of gross domestic product. The RBA wants to buttress a housing market in which prices have fallen for five straight quarters, support jobs and boost confidence that has weakened among consumers who are saving more.

After the decision, the local dollar weakened to as low as $1.0324 from $1.0413 before the announcement. Ten-year note yields declined as much as 14 basis points to 3.536 percent. The nation’s S&P/ASX 200 Index of stocks advanced 1 percent at 3:11 p.m. Sydney time.

‘Big Bazooka’

“The Reserve Bank has gone with the big bazooka,” said Joshua Williamson, a senior economist in Sydney at Citigroup Inc., one of the two who predicted the steeper reduction. “The Reserve Bank is saying we’ve done 50 basis points, this should actually help improve financial conditions and I think confidence as well. But I think they’re done and dusted for this cycle now.”

Commonwealth Bank of Australia and Westpac Banking Corp., the nation’s two largest mortgage lenders, are reviewing their interest rates, spokesmen for the banks said. National Australia Bank Ltd. spokesman Brian Walsh declined to say whether the bank will cut rates. Australia & New Zealand Banking Group Ltd. announces its rate moves on the second Friday of each month.

Bank’s Rates

Australia’s four biggest banks, which account for more than 80 percent of the nation’s mortgage market, say the RBA’s cash rate has become less relevant to funding costs that they say are rising. The banks raised variable home-loan rates this year to guard profit margins. This has prompted speculation they won’t pass on reductions in the cash rate in full, pressuring policy makers to ease more than in the past.

Policy makers “have reasserted that they do control monetary policy,” said Warren Bird, co-head of global fixed interest and credit at Colonial First State.

Calls for Stevens to reduce rates have intensified in recent weeks, ranging from unions to business executives to the leader of the government.

“In the current economic environment, should the RBA consider it appropriate to change the cash rate, this could deliver widespread benefits for households and business -- noting that a number of sectors of the economy most under strain are arguably more sensitive to interest rates,” Prime Minister Julia Gillard said last month.

Swan’s Praise

Australian Treasurer Wayne Swan praised today’s RBA move and said it reflects the government’s “disciplined” fiscal policy and little inflation.

Australia’s so-called trimmed mean gauge of core consumer prices advanced 0.3 percent last quarter, the slowest pace since 1998. The overall consumer price index rose 0.1 percent from the previous three months, compared with the 0.6 percent increase forecast by economists in a Bloomberg News survey.

A private manufacturing gauge released today fell to the lowest in seven months in April, led by textiles and furniture as the sustained strength of the currency hurt exports.

The Australian dollar has risen in six of the past seven quarters, and bought $1.0425 earlier today in Sydney. Tourism, manufacturing and retail industries have weakened under the currency’s 42 percent rise in the past three years.

Elsewhere in the Asia-Pacific region, South Korea’s inflation moderated to a 21-month low in April, with consumer prices increasing 2.5 percent from a year earlier, a report showed today. Exports fell for a second month.

China’s Growth

Another report today showed China’s manufacturing expanded for a fifth month in April. The Purchasing Managers’ Index rose to 53.3 from 53.1 in March, China’s statistics bureau and logistics federation said. That’s the highest reading in a year and compares with the 53.6 median forecast in a Bloomberg News survey of 27 economists.

In Europe, Ireland will announce April consumer confidence data today, and housing prices in the U.K. in April probably fell from a month earlier, according to a survey by Bloomberg News.

In the U.S., a private report may show manufacturing expanded at a slower pace in April than a month earlier, indicating the industry that spurred the recovery almost three years ago is cooling.

The Institute for Supply Management’s factory index eased to 53 last month from 53.4 in March, according to the median estimate of 77 economists surveyed by Bloomberg News. Readings greater than 50 signal growth. Construction spending rose in March for the first time in three months, other data may show.

Australia’s economy is struggling to accelerate, unexpectedly posting back-to-back trade deficits as coal and metal exports slumped, a government report last month showed. Traders are betting there’s a 60 percent chance Stevens will lower rates by a quarter point to 3.5 percent at the next meeting in June, according to swaps data compiled by Bloomberg.

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