Wed, May 02, 2012 - Page 10 News List

Australia lowers key rate to 3.75 percent

FACTORS:Australia’s mining boom has strengthened its currency, but it has added pressure to its agriculture and tourism sectors and weakened economic conditions


Australia’s central bank slashed its benchmark interest rate by half a percentage point yesterday, a larger-than-expected cut that comes amid a slump in the housing market and lackluster growth in the nation’s economy outside the booming mining sector.

The decision by the Reserve Bank of Australia to lower the official cash rate to 3.75 percent follows the release last week of relatively weak inflation data. Economists had widely predicted a cut of only a quarter percentage point. The last interest rate cut was in December last year.

“This decision is based on information received over the past few months that suggests that economic conditions have been somewhat weaker than expected, while inflation has moderated,” Reserve Bank Governor Glenn Stevens said in a statement.

Last week, the Australian Bureau of Statistics released figures showing the annual inflation rate to March was 1.6 percent, down sharply from 3.1 percent a year earlier. The reserve bank’s target inflation rate for the year was 2 to 3 percent.


The bank cited the inflation data and a subdued housing market as reasons behind its decision. Stevens also noted slowing growth in the world economy, singling out the more moderate pace of growth in China and continuing tough conditions in Europe.

Sales of new homes fell to their lowest level in more than a decade in March — dropping 9.4 percent from a month earlier, the nation’s Housing Industry Association said in a statement on Monday. Housing prices in the country’s capital cities for the first quarter of this year were down 4.5 percent from the same period a year ago, the statistics bureau reported.

The housing association’s chief economist, Harley Dale, had called for the bank to cut rates by half a percentage point.

“The bank needs to send a clear signal that it is back on the case of assisting an economy that is clearly weaker than it anticipated in 2012,” Dale said.


Australia’s economy stayed strong throughout the global financial crisis thanks to a mining boom largely fueled by China’s demand for iron ore, coal and natural gas. However, the mining boom has also strengthened the Australian dollar, which is pressuring industries outside the resources sector such as agriculture, tourism and manufacturing.

Australian Treasurer Wayne Swan praised the bank’s decision.

“It’s very welcome, it is well-deserved and it is certainly much needed by households under financial pressure,” Swan told reporters in Canberra.

Michael Blythe, chief economist with Australia’s Commonwealth Bank, said the central bank was likely hoping to provide “a positive shock to consumer and business confidence by doing a bit more than people were expecting.”

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