Australia’s central bank cut its benchmark interest rate by a quarter percentage point yesterday as a slowdown in China’s economy and persistent weakness in Europe adds to uncertainty about Australia’s economic outlook.
The Reserve Bank of Australia’s decision to lower the rate to 3.25 percent was the bank’s third rate cut this year and comes amid concerns that the slowing economy in China — Australia’s biggest export market — will lead to a steep drop in demand for Australia’s lucrative mineral resources such as iron ore.
“Uncertainty about near-term prospects is greater than it was some months ago,” Reserve Bank of Australia Governor Glenn Stevens said in a statement. “Around Asia generally, growth is being dampened by the more moderate Chinese expansion and the weakness in Europe.”
Australia’s economy has remained strong thanks to a mining boom fueled by China’s demand for iron ore, coal and natural gas. However, lower commodity prices, Australia’s high dollar and China’s slowing growth have prompted concerns that Australia’s economic glory days may be numbered.
In his statement, Stevens said the mining boom is likely to peak next year and at “a lower level than earlier expected.”
Commonwealth Bank chief economist Michael Blythe said the bank had previously suggested the resources peak was several years away.
“The end’s a little bit closer than they were expecting, in which case you want the non-mining economy to start picking up,” Blythe said. “And lower interest rates obviously help that.”
Blythe predicted the central bank could cut the rate again as early as next month.
Australian Treasurer Wayne Swan dismissed suggestions that Australia was in imminent danger from China’s slowdown, telling reporters that China’s economy is 40 percent larger than it was before the global financial crisis.
“Whilst China may be growing a little more slowly than people had anticipated, it’s doing it from a very much bigger base,” Swan said.
He said the bank’s decision was a win for families and small businesses. The rate cut translates to a saving of about A$48 (US$49.46) a month on a A$300,000 mortgage.