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RBA Saw Rate-Cut Scope as Asia Slowdown Weakens Mining: Economy

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

Australia’s central bank saw scope to cut borrowing costs as the slowing global economy threatened to weaken Asia’s growth and cool the nation’s mining boom, according to the minutes of an Oct. 2 meeting.

“Growth in east Asia, including China, had slowed a little further,” according to the minutes released today in Sydney of the board’s decision to lower interest rates after three straight meetings on hold. “The gradual slowing of Chinese economic growth had been accompanied by declining exports to Europe for some time and, more recently, falls in exports to the United States and Japan.”

Australia’s economy is succumbing to a slowdown in world growth that the International Monetary Fund predicted a week ago would decelerate to the weakest pace since the 2009 recession. As the faltering outlook sustains the case for monetary easing from the U.S. to Japan, investors are pricing in an 82 percent chance of another 0.25-point cut in the Reserve Bank’s key rate to 3 percent in November, swaps data compiled by Bloomberg show.

“Probably the best thing for Australia now is for the RBA to cut rates further,” said Dominic Bryant, an economist at BNP Paribas in Hong Kong, citing weakening global demand for minerals as China’s growth slows. “That would help bring down the currency, help other parts of the economy.”

The Reserve Bank indicated today that a main engine of the nation’s growth -- the mining industry -- wasn’t looking as strong as previously projected.

Accommodative Stance

“There was an increased likelihood of growth over the coming year being somewhat weaker than earlier forecast,” according to the minutes. “The board judged that it was appropriate for the stance of monetary policy to be a little more accommodative.”

The RBA saw signs that the pace of global growth had “edged down,” the minutes showed. With this month’s 0.25 percentage-point reduction taking the benchmark to 3.25 percent, Governor Glenn Stevens has lowered the overnight cash rate target five times in the past year to help extend the economy’s 21-year run without a recession.

“The board had observed that the effects of earlier reductions in the cash rate were still working through the domestic economy, and that the outlook for inflation was consistent with” the 2 percent to 3 percent target range over the next one to two years, the minutes showed.

Elsewhere in the Asia-Pacific region, New Zealand’s annual inflation slowed to the weakest pace in more than 12 years last quarter as a stronger currency made imported goods cheaper, giving the central bank scope to maintain record-low interest rates.

U.K. Inflation

Asian stocks advanced, with the MSCI Asia Pacific Index rising 0.7 percent at 12:44 p.m. in Tokyo.

In Europe, U.K. consumer prices probably gained 2.2 percent in September from a year earlier, according to the median estimate of economists surveyed by Bloomberg News ahead of a report today. German investor confidence probably rose for a second month in October, according to another survey.

U.S inflation probably eased to 0.5 percent in September from the previous period, according to the median estimate of economists surveyed by Bloomberg News. Federal Reserve data may show industrial production grew 0.2 percent last month, a separate survey showed.

The Australian dollar traded at $1.0262, from $1.0257 just before the minutes. It earlier rose as much as 0.2 percent to $1.0269.

Job Gains

The Australian government’s report on third-quarter consumer prices is scheduled to be released Oct. 24, and the minutes showed the RBA board viewed inflation as benign. “Members concluded that the current assessment of the inflation outlook provided scope to adjust policy in response to the softer growth outlook,” the minutes showed.

The number of people employed rose by 14,500 last month, the biggest increase since May, after a revised 9,100 drop the prior month, the statistics bureau said last week. The jobless rate climbed to 5.4 percent from 5.1 percent in August, as more workers sought employment.

“Labor-market conditions appeared to have eased in recent months,” the minutes showed. “In addition, mining employment had recorded a modest decline in recent months for the first time since the middle of 2009.”

The local currency has dropped 1.2 percent this month as a slowdown in China’s economy and Europe’s fiscal crisis weigh on global growth. The Aussie has averaged $1.0290 in the past two years, compared with 73 U.S. cents in the prior decade.

Strong Aussie

“Members noted that the Australian dollar remained high by historical standards, notwithstanding the fall in commodity prices and weaker global and domestic outlook,” today’s minutes showed.

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.

“The recent volatility in iron ore and coal prices had also affected the outlook for mining investment over the next year or two,” the minutes showed. “Mining companies had become increasingly reluctant to commit to new investment projects that had been under active consideration and, in some cases, had delayed spending on committed projects and closed some older, higher-cost mines earlier than had been expected.”

Australia’s economic growth will slow to 3 percent next year from an estimated 3.3 percent expansion this year, the International Monetary Fund predicted last week.

The world economy will grow 3.3 percent this year and 3.6 percent next year, the IMF said in its Oct. 9 predictions, compared with July estimates of 3.5 percent in 2012 and 3.9 percent in 2013.

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