RBA Cuts Key Rate to Record-Low 2.75% to Combat Aussie: E

The Reserve Bank of Australia cut its benchmark interest rate to a record low, driving down a currency that has damaged manufacturing and boosted unemployment.

Governor Glenn Stevens reduced the overnight cash-rate target by a quarter percentage point to 2.75 percent, saying in a statement that the Aussie’s record strength “is unusual given the decline in export prices and interest rates.” Eight of 29 economists predicted the seventh cut in the past 19 months, while money markets had seen about a 50-50 chance.

“The board has previously noted that the inflation outlook would afford scope to ease further,” Stevens said. “At today’s meeting the board decided to use some of that scope. It judged that a further decline in the cash rate was appropriate to encourage sustainable growth in the economy.”

He joins global counterparts in embracing record-low rates in an economy where inflation is contained, mining spending is predicted to crest, and credit growth remains subdued. Stevens is aiming to rebalance growth as mining regions in the north and west thrive and manufacturers in the south and east struggle.

“It’s a seminal decision to put a 2 in front of a decimal point for interest rates, and the RBA has decided to maintain its easing bias,” said Joshua Williamson, a senior economist at Citigroup Inc. in Sydney who predicted today’s decision. “The currency has been the thorn in their side and the inflation data was the catalyst to act on the exchange rate concern.”

Currency Reaction

The Australian dollar fell to $1.0199 at 5:19 p.m. in Sydney, from $1.0238 before the decision. Three-year government bond yields dropped to as low as 2.47 percent, the least since Oct. 16. The benchmark S&P/ASX 200 Index pared a loss of as much as 0.7 percent to close 0.2 percent lower.

The U.S., Europe and Japan have cut rates to a record to stimulate demand. Federal Reserve Chairman Ben S. Bernanke has kept the key U.S. rate near zero for more than four years, while European Central Bank President Mario Draghi yesterday said policy makers are ready to cut again after reducing its benchmark to a record low 0.5 percent last week.

The RBA cash rate’s previous low was 2.89 percent in January 1960, according to the central bank. Australia, which hasn’t recorded a current account surplus since 1975, typically maintains higher benchmark interest rates than other developed economies in order to attract capital inflows to offset its current account deficit.

Pre-Election Budget

The government will next week hand down its last budget before elections due Sept. 14, with a deficit of A$14.5 billion ($14.8 billion) expected this fiscal year, according to the median estimate of 10 economists surveyed by Bloomberg.

The government blames the shortfall on the strength of the local dollar that is pushing down prices and business profits, crimping tax revenue. Treasurer Wayne Swan in December abandoned a pledge to balance the books and says the government is looking for savings to fund pre-election spending announcements.

“Lower interest rates are playing a very important part in our economy at the moment, to help us make the transition from resource-sector growth through to non-mining sector growth,” Swan told reporters in Canberra today. “The higher dollar is putting profound pressure on all sectors of the economy, particularly on the profitability of businesses, and then that of course flows right through to government revenue.”

Australia’s currency, which didn’t rise above 85 U.S. cents between 1990 and 2006, hasn’t dropped below that level in almost three years. Its record 10-month stretch above parity with the greenback is damping import costs, helping keep inflation below the middle of the range targeted by the RBA.

Currency Factor

“The exchange rate seems to have been a factor,” said Dominic Bryant, senior Asia economist for BNP Paribas SA in Hong Kong who predicted the cut. “The downward move in commodity prices has finally tested their patience.”

Australia’s economy has been powered by a once-in-a-century resource investment boom to meet demand in China. The central bank reiterated today that “with the peak in the level of resources sector investment likely to occur this year, there is scope for other areas of demand to grow more strongly over the next couple of years.”

Traders are betting Stevens will hold rates next month before cutting the benchmark at least once in the third quarter, according to data compiled by Bloomberg from interbank cash-rate futures. The contracts show a 68 percent chance he will hold at 2.75 percent on June 4, while the September futures indicate the rate will be 2.5 percent or lower by then.

Europe Data

“It appears that the RBA sees some residual ability to cut rates again,” Commonwealth Bank of Australia Economist Gareth Aird said in a research report. “At this stage, a rate cut to 2.5 percent in August following the release of the Q2 CPI would look the most appropriate time.”

Elsewhere in Asia, consumer prices in the Philippines increased 2.6 percent in April from a year earlier, less than economists’ forecast. In Europe, data is expected to show that German factory orders and French industrial production declined in March. In the U.S., job openings data for March will be released.

Australian job advertisements dropped for a second month in April and the unemployment rate jumped to 5.6 percent in March as employers shed 36,100 jobs.

General Motors Co.’s Holden division announced last month it will cut about 500 positions in Australia, saying the local dollar and currency devaluations in competing markets had made operations in the nation among the most expensive in the world.

The central bank added to 50 basis points of cuts in late 2011 and another 125 basis points in 2012 as past reductions have less of an impact than in prior easing cycles.

Slower Reaction

“It is now over 18 months since the RBA started to cut,” Citigroup said in a May 3 note to clients. “Despite this, only two of our 12 indicators currently are performing stronger” than they did when the RBA lowered rates in 2001.

The year-on-year growth in owner-occupied housing loans has slowed to 3.9 percent, the weakest pace since records began in 1991, according to central bank data.

The rate cut “will provide continued stimulus to strengthening housing markets,” Andrew Wilson, Sydney-based senior economist at Australian Property Monitors, said in an e-mailed release. “Lower interest rates and rising home buyer confidence are set to continue to generate house price growth although the performance of local economies remains the key.”

National Australia Bank Ltd., Commonwealth Bank and Westpac Banking Corp. said they will pass along the full interest-rate cut. Australia & New Zealand Banking Group Ltd. will set rates on May 10.

Australia recorded its slowest core consumer price growth in 14 years in the first quarter, government data showed April 24. The central bank’s preferred measure of inflation eased to 0.3 percent from the prior three months.

“Recent data on prices confirm that inflation is consistent with the target and, if anything, a little lower than expected,” Stevens said today. “The bank’s forecast remains that inflation over the next one to two years will be consistent with the target.”

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