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Australia puts growth ahead of inflation with rate cut

A man walks past the Reserve Bank of Australia in Sydney on Tuesday. Australia's central bank has cut its benchmark interest rate for a second consecutive month, lowering it a quarter percentage point to 3.5 per cent.

Rick Rycroft/Associated Press

The Reserve Bank of Australia took out some insurance against the worst-case scenario in Europe Tuesday, cutting its benchmark interest rate a quarter point to 3.5 per cent.

"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," governor Glenn Stevens said in a statement.

Mr. Stevens's counterpart in Canada, Mark Carney, likely will follow this same cautionary path later this morning. The Bank of Canada won't lower interest rates -- at 1 per cent, the overnight target already is extremely low. But with the immediate prospects for the global economy so uncertain, Mr. Carney has no reason to shift from his current stance.

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Because of Australia's close economic links to Asia, the Reserve Bank is a good source for perspective on China. The Australians are uneasy about the Chinese economy. Mr. Stevens said in his statement that China's economic growth is moderating, and that conditions elsewhere in Asia is uncertain. Asia is recovering from natural disasters, but that trend could be dampened by slower growth in China, Mr. Stevens said.

Most interesting is Mr. Stevens's willingness to put immediate growth concerns ahead of a longer term worry about inflation. Australian prices are contained at the moment, creating the opportunity for the RBA to lower its benchmark rate. But the central bank acknowledged inflation likely is on the rise. Mr. Stevens said inflation likely will stay within a range of 2-3 per cent. "In the near term, it is likely to be in the lower part of that range, though maintaining low inflation over the longer term will require growth in domestic costs to slow as the effects of the earlier high exchange rate wane," Mr. Stevens said.

With a present danger of financial turmoil and a global economic downturn, longer term worries about inflation can wait. That's the view Down Under. Things like the same Up North.

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About the Author
Senior fellow at the Centre for International Governance Innovation

Kevin Carmichael is a senior fellow at the Centre for International Governance Innovation, based in Mumbai.Previously, he was Report on Business's correspondent in Washington. He has covered finance and economics for a decade, mostly as a reporter with Bloomberg News in Ottawa and Washington. A native of New Brunswick's Upper St. More

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