Australia lowers key interest rate to 3 percent

AP News
Posted: Dec 04, 2012 12:35 AM

SYDNEY (AP) — Australia's central bank cut its benchmark interest rate by a quarter percentage point Tuesday, taking it to its lowest level since the global financial crisis, as slower growth in China, uncertainty over the U.S. outlook and stubbornly weak conditions in Europe undermine the Australian economy.

The Reserve Bank of Australia's decision to lower the rate to 3 percent was its fourth rate cut this year and widely predicted by economists. The stalemate in Washington over automatic tax increases and spending cuts, Europe's financial woes, lower commodity prices and an economic slowdown in China — Australia's biggest export market — prompted the decision, Reserve Bank Governor Glenn Stevens said in a statement.

The bank last dropped the rate to the record low of 3 percent in April 2009 in a bid to stimulate the economy during the height of the global financial crisis.

Australia's economy remained relatively strong during the downturn, as Chinese demand for the nation's vast mineral resources, particularly iron ore, fueled a mining boom. But China's slowing economy has prompted concerns that the boom won't last another three years as previously thought. In October, Stevens predicted it would hit its peak next year. That has prompted the bank to try and kick-start other parts of the Australian economy with rate cuts.

"Recent data confirm that the peak in resource investment is approaching," Stevens said Tuesday. "Available information suggests that the near-term outlook for non-residential building investment, and investment generally outside the resources sector, remains relatively subdued."

CommSec economist Savanth Sebastian said mining was the clear area of concern for the bank.

"The Reserve Bank in the last couple of months has really, finally admitted that the mining investment boom isn't going to run for another three years — it's 12 to 18 months," he said. "That has to be the key driver of this result."

Sebastian thinks it's likely the bank will cut rates again when it next meets in February, though he predicts the rate will not be lowered below 2.75 percent.

The bank's decision also follows the release of weaker-than-expected retail spending figures just weeks before Christmas. The Australian Bureau of Statistics on Monday reported retail spending remained flat in October, surprising economists who had predicted a rise of 0.4 percent.

Treasurer Wayne Swan was quick to counter concerns about the nation's financial health, saying Australia remained in great shape.

"Anybody who thinks that rates are at the same levels now for the same reason they were at lows during the global financial crisis simply can't be taken seriously when it comes to economic policy," he told reporters in Canberra, noting that the Australian dollar was at around 60 U.S. cents during the downturn. It now fetches around $1.04.