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Australia’s central bank cut rates on the back of a slowing Chinese economy

  • Australia’s central bank cut rates by one-quarter of 1 per cent citing the slowdown in China
  • Australia’s two-speed economy has been dominated by the China-led resources boom
  • The RBA also warned the predicted peak early next year in investment by the Australian resources sector

Hong Kong (Financial Times) — Australia’s central bank cut rates by one-quarter of 1 per cent on Tuesday citing the slowdown in China and Europe’s recession in its decision to reduce rates to 3.25 per cent.

The move, which took many economists by surprise, followed rate cuts and other stimulative measures introduced around the world as policy makers try to stoke flagging economies.

The RBA also warned the predicted peak early next year in investment by the Australian resources sector, which has been the driving force of the economy, may be lower than had been previously expected. The Australian dollar immediately dropped by more than half a cent to US$ 1.031, while the main Australian stock market index rose 1 per cent to 4433.7 points.

The US Federal Reserve and European Central Bank have both acted to shore up confidence in markets in the past month, while the People’s Bank of China has been pumping record amounts of short-term cash into money markets to ease liquidity strains there.

There had been significant uncertainty ahead of the RBA’s meeting, with the market largely pricing in a 25 basis point cut, while most economists expected the bank to hold. Markets are pricing in further rate cuts to as low as 2.5 per cent over the next 12 months.

However, Paul Bloxham, chief economist at HSBC in Australia and New Zealand, reckoned the RBA would stop cutting rates before then. Australian rates only got as low as 3 per cent in the immediate aftermath of the 2008 financial crisis.

“Looking forward, as we see the Chinese growth cycle as close to bottoming, we also have in mind that the RBA may be nearing the end of its easing cycle,” he said. “We see the 85 bps of cuts priced in over the next year as too much.”

Australia’s two-speed economy has been dominated by the China-led resources boom in recent years, but the country now needs to see a pick-up in domestic demand and consumption to protect its 3.5 per cent-plus growth rate.

“As this [resources investment] peak approaches it will be important that the forecast strengthening in some other components of demand starts to occur,” the RBA said, adding that inflation pressures remained consistent with its 2 per cent target.

The slowdown in China, Australia’s main trading partner, has hit commodity prices hard. Iron ore, Australia’s most valuable export, has fallen by more than one-third since July, while thermal coal, another important export, is close to two-year price lows.

The RBA said that Australia’s terms of trade — a measure of the balance between the costs of imports and exports — had declined by 10 per cent since last year’s peak and would continue to fall. This will mean the country is spending more on imports relative to exports, which could stoke inflation later on.

“The exchange rate has remained higher than might have been expected, given the observed decline in export prices and the weaker global outlook,” the RBA said.

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