RBA Cuts Rate to 3.25% as Mining-Driven Growth Wanes: Economy

RBA Cuts Key Rate to 3.25% as Commodities Ease on Global Outlook
A blast pattern - holes containing explosives for blasting - is seen in the pit at Rio Tinto Group's West Angelas iron ore mine in Pilbara, Australia. Photograph: Ian Waldie

Australia’s central bank resumed cutting its benchmark interest rate to revive demand outside of a resource boom that may crest at a lower level than previously expected, sending the nation’s currency to a three-week low.

Governor Glenn Stevens and his board lowered the overnight cash-rate target by a quarter percentage point to 3.25 percent, the Reserve Bank of Australia said in a statement in Sydney today. The decision to end a three-meeting pause was predicted by nine of 28 economists surveyed by Bloomberg News, while the majority had forecast no change.

“The peak in resource investment is likely to occur next year, and may be at a lower level than earlier expected,” Stevens said. “As this peak approaches it will be important that the forecast strengthening in some other components of demand starts to occur.”

Stevens’s gloomier outlook marked a reversal for a central bank governor who said after a June speech that he felt the need to do some “cheerleading” on the economy to rebut vocal pessimists. The RBA chief today signaled weaker growth at home and abroad, reflected in lower prices for the nation’s key exports of iron ore and coal, as Europe’s fiscal crisis weighs on global growth.

“The RBA has rejoined other central banks around the world in what is becoming an increasingly coordinated policy response to anemic growth,” said Jarrod Kerr, director of Australia rates strategy at Credit Suisse Group AG in Singapore. “We continue to forecast further easing in this cycle.”

Rate Probability

Traders are pricing in a 60 percent chance of another quarter-point reduction next month, according to swaps data compiled by Bloomberg. That would match the 50-year low of 3 percent at the height of the 2008-2009 global financial crisis.

The so-called Aussie dropped after the decision, trading at $1.0309 at 5:31 p.m. in Sydney, compared with $1.0365 before the announcement. It touched $1.0292, the lowest since Sept. 7.

In his statement, Stevens said the move to add to rate reductions he made in May and June reflects signs of weakness in the labor market, subdued inflation and a “modest” expansion in the U.S. economy.

“Growth in China has also slowed, and uncertainty about near-term prospects is greater than it was some months ago,” Stevens said. “Key commodity prices for Australia remain significantly lower than earlier in the year, even though some have regained some ground in recent weeks.”

Surging Currency

The Australian dollar came within 5 U.S. cents of a record high last month as the U.S. Federal Reserve and the European Central Bank announced plans for open-ended asset purchases to stave off economic stagnation, while China pledged increased spending on infrastructure.

Even after today’s rate cut, Stevens has among the most monetary firepower among major developed economies. Benchmark rates are near zero in the U.S. and Japan, 0.5 percent in the U.K., 0.75 percent in the euro area, 1 percent in Canada and 2.5 percent in New Zealand.

Since the RBA’s Sept. 4 meeting, government data indicated a weaker economy: growth slowed in the second quarter to 0.6 percent from 1.4 percent in the first three months of the year; employers unexpectedly cut payrolls in August; the nation recorded a wider-than-expected trade deficit in July; and business confidence declined.

“The labor market has generally softened somewhat in recent months,” Stevens said today.

China’s Slowdown

A quarter of Australia’s exports, making up about 5 percent of gross domestic product, goes to China, and 60 percent of those shipments are iron ore. China’s manufacturing contracted a second month for the first time since 2009, a government survey indicated yesterday.

The data add to signs that China’s growth rate is at risk of reaching a 22-year low as the ruling Communist Party prepares to begin installing a new generation of leaders next month. China’s central bank has held off from adding to rate cuts in June and July, partly on concern housing prices will rebound, Chen Yulu, a People’s Bank of China academic adviser, said last week.

“The board judged that, on the back of international developments, the growth outlook for next year looked a little weaker, while inflation was expected to be consistent with the target,” Stevens said in today’s statement.

Tame Inflation

The RBA aims for annual consumer-price gains in a range of 2 percent to 3 percent on average.

Elsewhere in the Asia-Pacific region today, a report showed South Korea’s inflation accelerated the most in three months in September after typhoons damaged crops and a holiday boosted demand for food.

Consumer prices increased 2 percent from a year earlier after a 1.2 percent gain in August, Statistics Korea said today in Gwacheon, south of Seoul, nine days before the central bank decides interest rates. The median estimate in a Bloomberg News survey of 12 economists was for a 1.8 percent gain.

Asian stocks advanced, with the MSCI Asia Pacific Index rising 0.1 percent at 4:40 p.m. in Tokyo.

In Europe today, a government report in Spain may show the number of people registering for jobless benefits rose to the highest level since February, a survey showed.

In the U.S. day ahead, Commerce Department figures may show 14.5 million total vehicle sales at an annual rate in September, a survey of economists showed, little changed from the rate in prior month.

Weaker Growth

Australia’s economy grew about 4 percent in the first half of 2012 from a year earlier on the strength of resource-industry investment and consumer spending. Still, weaker commodity prices and an elevated currency prompted mining companies including BHP Billiton Ltd. and Fortescue Metals Group Ltd. to put off projects and cut jobs in the past two months.

“Credit growth has softened of late and the exchange rate has remained higher than might have been expected, given the observed decline in export prices and the weaker global outlook,” Stevens said.

The Australian government is aiming to return its budget to surplus this fiscal year and Treasurer Wayne Swan sought to take credit for the central bank’s decision. “These cuts have been made possible by our responsible budget policy,” he told reporters in Canberra today.

The RBA lowered borrowing costs by 1.25 percentage points from November to June to help shield the economy from Europe’s debt crisis and slower growth in China.

Stevens will probably cut rates again next month, most economists surveyed said. The RBA will lower borrowing costs by a quarter point to 3 percent on Nov. 6, according to 12 of 21 economists polled by Bloomberg News.

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