Australia cuts interest rate to record low 2 percent

AP News
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Posted: May 05, 2015 2:23 AM

CANBERRA, Australia (AP) — Australia's central bank cut its benchmark interest rate to a record low of 2 percent on Tuesday in a bid to jolt the nation's economy which is weighed by falling commodity prices and weakening demand from China.

The Reserve Bank of Australia's quarter percentage point rate cut was the first in three months.

Before the last cut in February, the interest rate had been steady at 2.5 percent since August 2013.

Economists largely anticipated the move, although some thought the bank would hold off until after the government released its budget next week for the fiscal year beginning July 1.

Resource-rich Australia managed to avoid a recession during the global financial crisis thanks to a decade-long mining boom. But with the economy weakening in China, which is Australia's largest export market, prices for commodities such as iron ore and coal have dropped.

Now, Australia's jobless rate of 6.1 percent has overtaken that of the United States which was 5.5 percent in March. The Australian figure for March had improved slightly from 6.2 percent in February.

RBA Governor Glenn Stevens said in a statement the global economy was expanding at a moderate pace, but commodity prices have declined over the past year, in some cases sharply.

"Looking ahead, the key drag on private demand is likely to be weakness in business capital expenditure in both the mining and non-mining sectors over the coming year," Stevens said.

Public spending is also expected to be subdued. The economy was therefore likely to be operating with a degree of spare capacity for some time yet.

The central bank forecast inflation to remain within the target range of between 2 and 3 percent over the next one to two years, even with a lower exchange rate.

"Low interest rates are acting to support borrowing and spending, and credit is recording moderate growth overall, with stronger lending to businesses of late," Stevens said.

The Australian dollar has declined sharply against a rising U.S. dollar over the past year, though less so against a basket of currencies.

"Further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices," Stevens said.

The Australian dollar dipped on the RBA's announcement then quickly rebounded to $0.788. The stock market briefly surged then retreated.

Treasurer Joe Hockey said Australian interest rates remained relatively high compared to many other countries, which was putting upward pressure on the Aussie dollar.

He said Stevens recognized green shoots in the Australian economy including encouraging trends in household demand and jobs growth,

"This interest rate cut is going to help to facilitate those green shoots," Hockey told reporters. "In fact, to carry on the metaphor, it's as much about putting fertilizer on the green shoots as anything else."

Hockey said the rate cut was "in sync" with his budget to be announced week which will include infrastructure spending and incentives for small business to borrow money to invest.

Innes Willox, chief executive of the Australian Industry Group, a leading business organization, said the rate cut "acknowledges the fragile state of our economy now that mining investment is well past its peak and other sectors have not taken up the slack."

"The rate cut should be supported by a mildly stimulatory budget targeted at boosting business confidence and investment," Willox said in a statement.

Ben Jarman, an economist with the J.P. Morgan, said the Reserve Bank was losing patience with weak business investment outside the mining industry.

"Clearly the absence of lift in non-mining business investment is the missing piece in terms of their growth forecast right now," he said. "So we think that they're running out of patience in terms of getting that adjustment to happen and that's why they've moved today."