Australian central bank cuts rates to new low of 2.5%

SYDNEY, New South Wales: Australia’s central bank cut interest rates to a new record low of 2.5 percent, 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 percent and bump up unemployment to 6.25 percent, compared with 2.75 percent and 5.75 percent seen in the May budget.
Stevens singled out unemployment as a concern, noting that it had “edged higher” to 5.7 percent 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 percent 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 percent 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 Aus$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 rates were now “past the emergency level, leaving catastrophe, obliteration and annihilation levels, until we hit USA and Japan levels.”
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.