Australian rates cut to new low as mining boom slows

PUBLISHED : Tuesday, 06 August, 2013, 2:23pm
UPDATED : Wednesday, 07 August, 2013, 5:01am

Australia's central bank cut its main cash rate by a quarter percentage point to a record low of 2.5 per cent yesterday as it tries to prepare the economy for life after the mining boom.

The Australian dollar edged up on the news as the market had considered it almost certain that the Reserve Bank of Australia would cut rates at its monthly policy meeting.

"The board has previously noted that the inflation outlook could provide some scope to ease policy further, should that be required to support demand," RBA governor Glenn Stevens said in a brief statement.

"At today's meeting, and taking account of recent information on prices and activity, the board judged that a further decline in the cash rate was appropriate."

This was the eighth move in an easing cycle that began in November 2011 and takes rates below the depths hit during the global financial crisis.

Markets have already baked in another move to 2.25 per cent by Christmas, and there is no hint of a tightening priced in for at least the next year.

That outlook is reflected in government bond yields, with the cost of borrowing for one year hitting a record low of 2.24 per cent this week. Even two and three-year yields are below the cash rate.

In large part, Australia is a victim of its own good fortune. Its embarrassment of natural resources were just what China needed to fuel its growth miracle, leading to a truly massive boom in mining.

As a result, mining investment has quadrupled as a share of the Australian economy but now looks to have peaked.

Spending having risen so rapidly, the risk is that it could fall quite sharply from quarter to quarter, taking chunks out of economic growth.

The central bank has been seeking to enliven the rest of the economy with lower borrowing costs, but consumers and businesses have been slow to respond.

Households favour saving over borrowing, while business confidence is low and political uncertainty high ahead of a federal election next month.

The government is in no position to provide fiscal stimulus, having slashed its revenue projections by A$33 billion (HK$230 billion) over four years to reflect the country's slower economic growth.