Australia central bank cuts rates

REUTERS

Sun reflects off the front door sign of the Reserve Bank of Australia building in Sydney.

Australia's central bank cut interest rates for a second month running on Tuesday in a bid to shore up confidence at home, just as finance chiefs of advanced economies around the world prepare to hold emergency talks on the euro zone debt crisis.

Citing a weaker outlook abroad and only modest domestic growth, the Reserve Bank of Australia cut its cash rate by 25 basis points to 3.5 percent.

The local dollar showed little lasting reaction because the decision was largely expected, although some had hoped for an even bigger cut given the darkening global outlook.

“The Board judged that, with modest domestic growth and a weaker and more uncertain international environment, the outlook for inflation afforded scope for a more accommodative stance of monetary policy,” RBA Governor Glenn Stevens said in a statement after the central bank's monthly meeting.

The move followed grim economic data around the world, from US payrolls to Chinese manufacturing. Australia's A$1.4 trillion economy is heavily dependent on foreign demand for its resource exports.

“It's a welcome decision. It is a win for households and it's a dividend of returning our budget to surplus,” Treasurer Wayne Swan told reporters.

“The announcement today from the Reserve Bank gives Australians confidence that the RBA has further room to move, and of course a big part of that flexibility is the return to surplus,” he said.

Rates are now the lowest since December 2009, but still far above those in the United States, Japan or Europe, which is one reason investors are pricing in as much as 100 basis points of further cuts within a year.

That would take rates beneath the record lows of 3 percent plumbed during the worst days of the global financial crisis.

Australian households are highly sensitive to mortgage rates as over a third have home loans, most of which are variable. Mortgage debt totals around A$1.2 trillion ($1.17 trillion), or 1.5 times household disposable income, and paying the annual interest on it takes almost a tenth of those earnings.

A reduction of 25 basis points in the standard variable mortgage rates saves an average borrower around A$540 a year.

Australian banks are expected to pass on only part of the latest easing to customers, choosing instead to maintain profit margins in the face of higher funding costs.

“It is pretty clear what has driven today's decision and ultimately the developments globally will continue to largely be the key driver of policy for much of the rest of this year at least,” said Su-Lin Ong, senior economist at RBC. She expects at least one more interest rate cut this year.

Global financial markets have been gripped with fears that Spain's banking crisis will spiral out of control and that Greece may face a messy exit from the euro zone after a June 17 election.

Other central banks this week will also be closely watched, with the Bank of Canada due to hold its policy meeting later on Tuesday, followed by the European Central Bank on Wednesday.

IMPACT HITS HOME

The impact of Europe's debt crisis hit home hard on Tuesday when the country's top airline, Qantas Airways, warned of a steep fall in underlying profit due to losses on its international business. Shares in the airline slumped to a record low of A$1.16.

There are also plenty of other home-grown reasons for the RBA to favour monetary stimulus right now.

Price pressures are subdued, with measures of underlying inflation near the floor of the central bank's long-term target band of 2 to 3 percent, and fiscal policy is being tightened.

A strong currency and intense foreign competition has pressured manufacturing and tourism, while a shift in spending habits by penny-pinching consumers has scarred retailers and the housing market.

Australia's huge mining sector continues to enjoy a once-in-a-century investment boom, yet export growth has been hampered by a combination of bad weather and supply bottlenecks.

Official figures out on Tuesday showed the country's exports dropped by more than 7 percent in the first quarter. As a result, net exports subtracted 0.5 percentage points from gross domestic product (GDP) in the first quarter.

The main GDP report is due on Wednesday and is expected to show the economy grew a sub-par 0.5 percent in the quarter, compared to the previous quarter. - Reuters