Australia Central Bank Cuts Key Rate to 4.5% in First Reduction Since 2009

Australia’s central bank lowered its benchmark interest rate today for the first time since April 2009 as inflation eases and weaker global growth threatens to slow the nation’s resource-driven economy.

“Recent information suggests the subdued demand conditions and the high exchange rate have contained inflation,” Reserve Bank of Australia Governor Glenn Stevens said in a statement after reducing the developed world’s highest borrowing costs by a quarter of a percentage point to 4.5 percent. Sixteen of 27 economists surveyed by Bloomberg News predicted the move; the rest forecast no change.

The cut, which sent the nation’s currency and bond yields falling, reflects a decline in the nation’s underlying inflation rate to the weakest in 14 years as Europe’s debt crisis dims prospects for the world economy. Stevens joins Group of 20 counterparts from Jakarta to Ankara to Brasilia in easing monetary policy as they seek to bolster domestic demand.

“With overall growth moderate, inflation now likely to be close to target and confidence subdued outside the resources sector, the board concluded that a more neutral stance of monetary policy would now be consistent with achieving sustainable growth and 2 percent to 3 percent inflation over time,” Stevens said.

Currency Falls

The Australian dollar dropped to $1.0487 at 2:54 p.m. in Sydney from $1.0530 yesterday in New York and $1.0527 before the decision. The yield on 10-year government bonds fell nine basis points, or 0.09 percentage point, from yesterday’s close to 4.42 percent.

Australian Prime Minister Julia Gillard said the decision brought “welcome relief” to households. Westpac Banking Corp. said its lower borrowing costs announced today would save customers A$41 monthly on a A$250,000 mortgage.

China is Australia’s biggest trading partner and its demand for iron ore, coal and energy has driven the nation’s terms of trade, or export prices relative to import prices, to a record. Earlier today, the China Federation of Logistics and Purchasing said a manufacturing index fell in October for the first time in three months.

Across Asia, “trade performance, however, is starting to see some effects of a significant slowing in economic activity in Europe, where the prospects are for economic weakness to continue,” Stevens said in today’s statement.

Mining Boom

Australia’s overseas shipments and a A$430 billion ($450 billion) pipeline of resource projects helped spur the local currency to $1.1081 on July 27, the highest level since it was freely floated in 1983.

Europe’s fiscal troubles have weighed on the so-called Aussie in recent months. The world’s fifth most-traded currency fell 10 percent last quarter on concern Greece would default and trigger a repeat of the 2008 credit freeze after the collapse of Lehman Brothers Holdings Inc.

European Union leaders agreed on Oct. 27 to increase a bailout fund to 1 trillion euros ($1.4 trillion), recapitalize banks and write down Greek debt by 50 percent.
Stevens today noted stronger recent economic data in the U.S. and signs that Europe is getting its fiscal turmoil under control. “But it is likely to be some time yet before concerns about the European situation can definitively be laid to rest and the effects of the recent turmoil on confidence may result in a period of precautionary behaviour by firms and households,” he said.

Lower Inflation

An Australian government report last week showed the average of two core measures of consumer prices closely watched by the RBA was a 0.3 percent gain in the three months through September, the smallest rise since the third quarter of 1997.

On an annual basis, the two measures averaged about 2.5 percent, the mid-point of the central bank’s target of 2 percent to 3 percent inflation.

Economists including Bill Evans at Westpac and Kieran Davies at Royal Bank of Scotland Group Plc predict the RBA will lower its inflation forecasts when it releases its quarterly monetary policy statement on Nov. 4.(Bloomberg)