Australia Cuts Interest Rate to Record Low 2.75 pct
Australia's central bank cut interest rates to a record low 2.75 percent Tuesday as investment in the Asia-driven mining sector hits its peak and the persistently high dollar squeezes local industry.
The Reserve Bank of Australia's shock decision to slash 25 basis points takes the official cash rate to never-before-seen lows, and is aimed at priming those areas struggling as the economy transforms away from mining.
"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," said RBA governor Glenn Stevens.
"(The bank) judged that a further decline in the cash rate was appropriate to encourage sustainable growth in the economy, consistent with achieving the inflation target."
The Australian dollar slumped to U.S.$1.0184 from $1.0238 immediately prior to the bank's meeting, where it had been widely expected to leave rates on hold at 3.0 percent, reached in December.
Rates have not been this low since the establishment of the reserve bank in 1959.
Analysts said the Australian economy needed stimulus as mining exports to Asia, which helped it dodge recession during the global downturn, recede.
"Mining investment has been the main driver of growth in recent years, but it is set to start declining within the next couple of quarters," said Capital Economics analyst Daniel Martin, adding that he expected a further cut before the end of the year.
"Other sources of growth will be needed to avoid a significant overall slowdown."
Treasurer Wayne Swan welcomed the cut, saying monetary policy would play an important part in "the transition from resource sector growth through to non-mining sector growth".
He rejected comparisons with the financial crisis as "irresponsible", noting that at that time the Australian dollar was worth 60 U.S. cents, "global growth demand had tanked and global demand had fallen off a cliff".
The Australian government downgraded its annual revenue forecasts Tuesday, warning income had plunged Aus$17 billion due to a China-driven commodity slowdown and pressures from the dollar, paving the way for spending cuts.
Stevens said domestic growth had slowed in the second half of 2012 and was running below long-term averages, with unemployment rising to 5.6 percent in March, its highest level in more than three years.
The economy expanded 0.6 percent in the three months to December and 3.1 percent through 2012, with analysts warning that the key mining sector was covering up broader weakness as the resources boom nears its peak.
Stevens said there were "prospects for some increase in business investment outside the resources sector over the next year", with productivity improving and labour costs down.
Globally, he noted that growth was expected to come in a little below trend, with the United States on a "moderate" trajectory and China at a "more sustainable but still robust pace", but Europe weighing on the outlook.
Stevens said inflation was currently running "lower than expected", with the exchange rate, on the other hand, "little changed at a historically high level over the past 18 months".
"(That) is unusual given the decline in export prices and interest rates during that time," he said.
"Moreover, the demand for credit remains, at this point, relatively subdued."
Source: Agence France Presse
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