Central bank finally takes knife to rate

Australia's central bank lowered its benchmark interest rate yesterday for the first time since April 2009 as inflation eases and weaker global growth threatens to slow the nation's resource-driven economy.

"Recent information suggests the subdued demand conditions and the high exchange rate have contained inflation," Reserve Bank of Australia Governor Glenn Stevens said after reducing the developed world's highest borrowing costs by a quarter of a percentage point to 4.5 per cent. Sixteen of 27 economists surveyed by Bloomberg News predicted the move; the rest forecast no change.

The cut, which sent the nation's currency and bond yields falling, reflects a decline in the nation's underlying inflation rate to the mildest in 14 years as Europe's debt crisis dims prospects for the world economy. Stevens joins Group of 20 counterparts from Jakarta to Ankara to Brasilia in easing monetary policy as they seek to bolster domestic demand.

"With overall growth moderate, inflation now likely to be close to target and confidence subdued outside the resources sector, the board concluded that a more neutral stance of monetary policy would now be consistent with achieving sustainable growth and 2 per cent to 3 per cent inflation over time," Stevens said.

Australian Prime Minister Julia Gillard said the decision brought "welcome relief" to households. Westpac Banking said its lower borrowing costs announced yesterday would save customers A$41 ($53) monthly on a A$250,000 mortgage ($325,000).

China is Australia's biggest trading partner and its demand for iron ore, coal and energy has driven the nation's terms of trade, or export prices relative to import prices, to a record.

Earlier yesterday, the China Federation of Logistics and Purchasing said a manufacturing index fell in October for the first time in three months.

Across Asia, "trade performance, however, is starting to see some effects of a significant slowing in economic activity in Europe, where the prospects are for economic weakness to continue", Stevens said in yesterday's statement.

Australia's overseas shipments and a A$430 billion pipeline of resource projects helped spur the local currency to US$1.1081 on July 27, the highest level since it was freely floated in 1983.

Europe's fiscal troubles have weighed on the aussie dollar in recent months. The world's fifth most-traded currency fell 10 per cent last quarter on concern Greece would default and trigger a repeat of the 2008 credit freeze after the collapse of Lehman Brothers.

European leaders agreed last week to increase a bailout fund to €1 trillion ($1.7 trillion), recapitalise banks and write down Greek debt by 50 per cent.

Stevens yesterday noted stronger recent economic data in the US and signs that Europe is getting its fiscal turmoil under control. "But it is likely to be some time yet before concerns about the European situation can definitively be laid to rest and the effects of the recent turmoil on confidence may result in a period of precautionary behaviour by firms and households," he said.

An Australian government report last week showed the average of two core measures of consumer prices closely watched by the RBA was a 0.3 per cent gain in the three months through September, the smallest rise since the third quarter of 1997.

On an annual basis, the two measures averaged about 2.5 per cent, the mid-point of the central bank's target of 2 per cent to 3 per cent inflation.

- Bloomberg