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RBA Lowers Key Rate as Europe, China Growth Risks Mount: Economy

RBA Governor Glenn Stevens
Glenn Stevens, governor of the Reserve Bank of Australia. Photographer: Ian Waldie/Bloomberg

The Reserve Bank of Australia cut its benchmark interest rate by a quarter percentage point to the lowest since 2009 as Europe’s debt crisis and slower Chinese growth overshadowed a stronger domestic labor market.

Governor Glenn Stevens and his board lowered the overnight cash rate target to 3.5 percent, the RBA said in a statement in Sydney today. Thirteen of 27 economists surveyed by Bloomberg News predicted the move, while four forecast a half-point reduction and 10 expected borrowing costs to remain unchanged.

“Europe’s economic and financial prospects have again been clouded by weakening growth, heightened political uncertainty and concerns about fiscal sustainability and the strength of some banks,” Stevens said in the statement. In Asia “the ongoing trend is unclear and could be dampened by slower Chinese growth,” he said.

The local currency and stocks maintained earlier advances after Stevens’s second rate reduction in as many meetings. Australia’s economy is giving mixed signals, with the unemployment rate at a one-year low of 4.9 percent and an investment pipeline worth almost A$500 billion ($489 billion) driving growth in some regions, even as export prices have slumped, building approvals dropped and retail sales weakened.

The Australian dollar bought 97.88 U.S. cents at 3:54 p.m. in Sydney from 97.34 cents immediately before the decision was announced. The S&P/ASX 200 Index held earlier gains, rising 1.3 percent to 4,038.200.

Falling Unemployment

The jobless rate in Australia is less than half the 11 percent in the euro area and lower than the U.S.’s 8.2 percent. In his statement, Stevens noted the local job market’s improvement.

“Overall labor market conditions firmed a little, notwithstanding job shedding in some industries, and the rate of unemployment remains low,” Stevens said. “Nonetheless, both households and businesses continue to exhibit a degree of precautionary behavior, which may continue in the near term.”

Elsewhere in the region, China’s services industry expanded at a faster pace in May, climbing to a 19-month high, a survey of purchasing managers released by HSBC Holdings Plc and Markit Economics showed. Philippine inflation eased to 2.9 percent last month compared with a 3 percent advance in April, giving the nation’s central bank room to cut interest rates should Europe’s debt crisis worsen.

The MSCI Asia Pacific Index advanced 1.5 percent to 110.63 at 2:54 p.m. in Tokyo after four straight sessions of declines. The index yesterday closed at the lowest level since Nov. 25.

EU Reports

Reports later today are forecast to show retail sales in Europe slid for the second time in three months in April from March, and German manufacturing orders dropped 1.1 percent from the previous month, the first decline since January, surveys of economists showed.

In the U.S., the Institute for Supply Management’s non-manufacturing index, which covers almost 90 percent of the economy, held at 53.5, matching April’s four-month low, according to analysts’ estimates.

Reflecting the weakness in the global economy, Qantas Airways Ltd. shares plunged to a record low in Sydney today after saying annual profit may fall as much as 91 percent because of losses on overseas routes and higher fuel costs. Australia’s largest carrier, which listed in 1995, slumped as much as 18 percent.

‘Cautionary Behavior’

“The RBA has put more weight on global factors,” said Matthew Sherwood, head of investment markets research in Sydney at Perpetual Investments, which manages about $23 billion. “The bank is clearly worried about the outlook for Europe and households domestically are showing cautionary behavior. They are a little wary of using the ammunition too quickly.”

BHP Billiton Ltd., the world’s biggest mining company, won’t approve any major projects until the end of the year as costs rise and commodity prices ease, Chief Executive Officer Marius Kloppers said last week.

BHP is due to decide on three projects -- South Australia’s Olympic Dam copper-uranium expansion, an iron-ore port expansion in Western Australia and a potash project in Canada -- by the end of the year. They may cost a combined $68 billion to build, according to a May 23 estimate from Deutsche Bank AG.

Stevens last month lowered the benchmark by a half percentage point, and minutes of the meeting showed that the RBA’s decision on the size of the cut reflected a need for lower consumer borrowing costs.

Mortgage Rates

Australia’s four biggest banks are trying to guard margins against further erosion from elevated wholesale funding costs, by passing through less of the central bank’s rate reductions to mortgage holders.

Commonwealth Bank of Australia, Westpac Banking Corp. and National Australia Bank Ltd. said they are reviewing rates after today’s decision. Australia & New Zealand Banking Group Ltd. is due to do so later in the month.

The RBA, in its quarterly monetary policy statement released May 4, cut growth and inflation forecasts. It predicted average growth of 3 percent in 2012, down from a February estimate of 3.5 percent. Consumer prices will rise 2.5 percent in the year to December, from a previous prediction of 3 percent; underlying inflation is forecast at 2.25 percent from a previous estimate of 2.75 percent, the RBA said.

Today, Stevens said: “The board judged that, with modest domestic growth and a weaker and more uncertain international environment, the outlook for inflation afforded scope for a more accommodative stance of monetary policy.”

Policy makers gave no indication of plans for monetary policy going forward, said Stephen Walters, JPMorgan Chase & Co.’s chief economist in Australia.

“But they’ve sort of settled back into that rhythm of 25-basis-point moves,” said Walters, one of the 13 who predicted today’s reduction. “There was some speculation that having gone 50 they were going to maintain those sort of hops but they haven’t done that.”

Stevens is scheduled to speak in the southern city of Adelaide on June 8.

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