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Sun reflects off the front door sign of the Reserve Bank of Australia building. (© Tim Wimborne / Reuters/REUTERS)
Sun reflects off the front door sign of the Reserve Bank of Australia building. (© Tim Wimborne / Reuters/REUTERS)

Australia central bank cuts rates, more seen likely Add to ...

Australia’s central bank cut interest rates by a quarter point to a three-year trough of 3.25 per cent on Tuesday as a slowdown in China, falling export prices and a high currency all dimmed the economic outlook at home.

The Australian dollar fell half of a U.S. cent as the market had not been fully priced for a move, with many analysts favouring November as the more likely window for a cut.

“The Board judged that, on the back of international developments, the growth outlook for next year looked a little weaker,” Reserve Bank of Australia (RBA) Governor Glenn Stevens said after the central bank’s monthly policy meeting.

“The Board therefore decided that it was appropriate for the stance of monetary policy to be a little more accommodative.”

The latest move brings the cuts delivered since last November to 150 basis points. Investors had priced in about a 60 per cent probability on an easing this week, in part due to concerns about China, Australia’s biggest export market.

Most economists had thought the central bank would wait for third-quarter inflation figures due later this month before pulling the trigger.

Still, with core inflation expected to remain near the floor of the RBA’s long-term target band of 2 to 3 per cent, markets had assumed further easing was inevitable.

“I think they have done the right thing,” said Shane Oliver, head of investment strategy at AMP Capital Investors. “The global economy is looking a bit shaky.”

“We are looking to another 0.25 per cent cut in November, and then another one in February or March next year, taking the cash rate to 2.75 per cent.”

Interbank futures are fully priced for a move to 3.00 per cent by Christmas. Overnight indexed swaps, which show where the market thinks the cash rate will be over time, have 2.75 per cent inked in on a 12-month horizon.

Yields on Australian 10-year bonds are under 3 per cent, so it is cheaper for the government to borrow for a decade than for banks to borrow overnight.

Australia is fortunate is still having plenty of room to cut. With rates near zero in the United States, Japan and U.K., those countries have had to take ever more exotic stimulus measures by buying massive amounts of government debt.

The easing already delivered helped the resource-rich economy grow a robust 3.7 per cent in the year to June, far outpacing its developed world peers. With annual output up at A$1.47-trillion ($1.5-trillion U.S.), it should pass Spain as the world’s 12th largest economy this year.

Yet global headwinds have only got greater as the cooling of China and a recession in Europe drag on world trade. The pain is being felt across Asia, leading the central bank of South Korea on Tuesday to shift its policy emphasis toward promoting growth.

Prices for iron ore and coal, Australia’s two largest export earners, have taken a beating in recent months, leading some miners to scale back on ambitious expansion plans.

The RBA’s Stevens conceded the outlook for mining, while still very strong, had cooled a little.

“The peak in resource investment is likely to occur next year, and may be at a lower level than earlier expected,” he wrote. “As this peak approaches it will be important that the forecast strengthening in some other components of demand starts to occur.”

This transition has been complicated by the stubborn strength of the local currency which is pressuring sectors such as manufacturing and tourism.

A dash of monetary largesse would also help offset a coming tightening in fiscal policy as the Labor government is wedded to returning the budget to surplus by next June, years if not decades before most other developed nations.

“They’re looking for the non-mining part of the economy to start making a greater contribution a bit sooner and lower rates are one way to assist that growth transition,” said Michael Blythe, chief economist at Commonwealth Bank.

“November looks a real possibility for another cut, particularly, if we get another friendly-looking inflation number (due out on Oct. 24).”

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