Bloomberg News

RBA Cuts Key Rate, Citing Risk Europe to Slow Global Growth

December 06, 2011

(Updates with comment from economist in fourth paragraph.)

Dec. 6 (Bloomberg) -- Australia’s central bank reduced its benchmark interest rate today for a second straight month as Europe’s fiscal crisis threatens to slow the nation’s commodity exports, sending the nation’s currency lower.

Reserve Bank Governor Glenn Stevens and his board cut the overnight cash-rate target by a quarter percentage point to 4.25 percent, saying in a statement that “financing conditions have become much more difficult, especially in Europe.”

“This, together with precautionary behavior by firms and households, means that the likelihood of a further material slowing in global growth has increased,” Stevens said in the statement.

The cut marked the RBA’s first consecutive easing since the depths of the world financial crisis in 2009 and reflected a worsening global outlook that’s weighing on an engine of Australia’s economy: exports. The local housing industry has slumped, with mortgage-loan growth falling to a record low, and subdued household spending containing inflation.

“It’s a reasonably dovish statement consistent with another cut in the first quarter,” said Michael Turner, an economist at RBC Capital Markets Ltd. in Sydney, citing the RBA’s comments on the risks to global growth and Asian trade from Europe’s debt problems. “There’s maybe a tiny bit of concern that the credit-market stress is starting to flow into the real economy.”

Currency Falls

The Australian dollar weakened to $1.0195 at 3:21 p.m. from $1.0234 before the decision as investors increased bets on further reductions in borrowing costs. Interest-rate swaps pegged to RBA policy meeting dates show traders expect Stevens to ease by a further 100 basis points by May, according to prices from Westpac Banking Corp.

Treasurer Wayne Swan, speaking at a news conference, urged the nation’s lenders to pass on the rate cut in full. Australia’s four largest banks -- Commonwealth Bank of Australia, Westpac, National Australia Bank Ltd. and Australia & New Zealand Banking Group Ltd. -- said they are reviewing their interest rates after the RBA’s announcement.

“Short-term market interest rates have tended to decline a little further in recent weeks, though term funding conditions for financial institutions have become more difficult,” Stevens said today. “Credit growth remains subdued and asset prices have declined further over recent months.”

Germany, France

Germany and France risk losing their AAA credit ratings in a review of 15 euro nations for possible downgrades, Standard & Poor’s said yesterday as the region struggles to lower budget deficits with unemployment near 10 percent.

Evidence is growing that Europe’s sovereign-debt crisis is weakening growth in Asia’s developing economies, which the International Monetary Fund predicted in September would lead a global recovery next year.

China is Australia’s biggest trading partner and its demand for iron ore, coal and energy drove the nation’s terms of trade -- a measure of export prices relative to import prices -- to a record this year.

“China’s growth has been slowing,” Stevens said today. “Trade in Asia is now, however, seeing some effects of a significant slowing in economic activity in Europe.”

Separate reports last week showed manufacturing slumped in China and the euro region to the weakest levels in more than two years. A Nov. 30 government report showed India’s economy grew 6.9 percent in the three months through September, the weakest expansion since the second quarter of 2009.

Mining Boom

Australia’s overseas shipments and a A$456 billion ($465 billion) pipeline of resource projects helped spur the local currency to $1.1081 on July 27, the highest level since it was freely floated in 1983.

Europe’s troubles have weighed on the so-called Aussie in recent months. The world’s fifth most-traded currency has fallen 8 percent since its peak on concern Greece would default and trigger a repeat of the 2008 credit freeze after the collapse of Lehman Brothers Holdings Inc.

In Australia, data last week showed home-building approvals plunged in October for a second straight month and retail sales growth slowed. The number of permits granted to build or renovate houses and apartments fell 10.7 percent from September, when they dropped a revised 14.2 percent, the Dec. 1 report showed. Retail sales in October gained 0.2 percent, half the increase economists estimated.

Retailers applauded Stevens’s decision today, saying it will help holiday sales later this month.

“A second cash rate fall was first on retailer’s list of requests in their letter to Santa this year,” Australian National Retailers Association Chief Executive Officer Margy Osmond said in a statement.

Even after today’s reduction, Australia’s benchmark borrowing cost is among the highest in the developed world. Central bank policy rates in Japan and the U.S. are near zero, the U.K.’s is 0.5 percent, Canada’s is 1 percent, the euro zone’s is 1.25 percent and New Zealand’s is 2.5 percent.

--With assistance from Daniel Petrie, Angus Whitley and Iain Wilson in Sydney. Editors: Brendan Murray, Garfield Reynolds

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net


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