Australian central bank cuts rates to new low of 2.5%

Australian central bank cuts rates to new low of 2.5%

    POSTED: 06 Aug 2013 1:50 PM
 
Australia's central bank cut interest rates to a new record low of 2.5 per cent on Tuesday, just weeks ahead of the September 7 national polls.

SYDNEY, New South Wales: Australia's central bank cut interest rates to a new record low of 2.5 per cent Tuesday, underscoring fears of a major economic slowdown shaping up as a key election battleground.

The Reserve Bank of Australia shaved 25 basis points off the official cash rate to lows not seen since the central bank's 1959 establishment, just weeks out from the September 7 national polls.

RBA Governor Glenn Stevens cited recent muted inflation and retail sales data in unveiling the cut, which follows a grim pre-election budget update from the ruling Labor party last week.

"In Australia, the economy has been growing a bit below trend over the past year. This is expected to continue in the near term as the economy adjusts to lower levels of mining investment," Stevens said.

The peak in Australia's decade-long Asia-led mining investment boom and slowdown in key market China saw Labor scale back its growth forecasts for 2013/14 to 2.5 per cent and bump up unemployment to 6.25 per cent, compared with 2.75 per cent and 5.75 per cent seen in the May budget.

Stevens singled out unemployment as a concern, noting that it had "edged higher" to 5.7 per cent in June, its highest level in almost four years and just shy of its peak during the global financial crisis.

The cash rate is also lower than it ever was during the global downturn -- it last bottomed out at 3.00 per cent in September 2009.

The latest cut was widely expected by analysts after inflation came in below forecasts for a third successive quarter last month at a muted 0.4 per cent and retail spending was flat in the three months to June.

"The RBA would have hoped lower interest rates would encourage credit growth, but it has remained sluggish," said Capital Economics analyst Daniel Martin.

"Overall, we doubt that policy loosening, even after today's rate cut, will fully offset the slowdown in mining investment," he added.

Australia was among a select few advanced economies to dodge recession during the financial crisis, due to its links with powerhouse Asian economies.

But Prime Minister Kevin Rudd, who is seeking a third term in office for Labor, warned last week A$33.3 billion had been wiped off his spending plans for the next four years due to the mining headwinds.

Both Rudd and conservative opponent Tony Abbott have put economic management at the heart of their election campaigns as Australia faces a major transition to non-mining drivers of growth.

Tuesday's decision is a mixed bag for Labor. While it underscores fears of an economic slowdown seized on by the conservatives as evidence of mismanagement, it also means an easing in cost-of-living pressures for key mortgage-belt voters.

Opposition finance spokesman Joe Hockey said "business and consumer confidence in the United States is in better shape than business and consumer confidence in Australia", with voters worried about rising unemployment.

"This interest rate cut is about a struggling economy under Kevin Rudd," Hockey said. "We are heading in the wrong direction while the rest of the world is heading in the right direction."

Treasurer Chris Bowen said Labor "unapologetically welcomes the interest rate cut", saying it had been made possible by "responsible economic management".

"Under Labor, Australians can rely on the proven economic record that got Australia through the global financial crisis, saw the economy and jobs grow, while making record investments in health, education and infrastructure," said Bowen.

The Australian dollar edged up slightly on the decision, with some investors expecting a more drastic 50-basis-point cut, to 89.55 US cents from 89.23 cents immediately prior.

- CNA/ac

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