RBA Cuts Key Rate to Record-Low 2.75% to Combat Aussie: E

By Michael Heath, Bloomberg

The Reserve Bank of Australia cut its benchmark interest rate to a record low, driving down a currency that has damaged manufacturing and boosted unemployment.

Governor Glenn Stevens reduced the overnight cash-rate target by a quarter percentage point to 2.75 percent, saying in a statement that the Aussie’s record strength “is unusual given the decline in export prices and interest rates.” Eight of 29 economists predicted the seventh cut in the past 19 months, while money markets had seen about a 50-50 chance.

“The board has previously noted that the inflation outlook would afford scope to ease further,” Stevens said. “At today’s meeting the board decided to use some of that scope. It judged that a further decline in the cash rate was appropriate to encourage sustainable growth in the economy.”

He joins global counterparts in embracing record-low rates in an economy where inflation is contained, mining spending is predicted to crest, and credit growth remains subdued. Stevens is aiming to rebalance growth as mining regions in the north and west thrive and manufacturers in the south and east struggle.

“It’s a seminal decision to put a 2 in front of a decimal point for interest rates, and the RBA has decided to maintain its easing bias,” said Joshua Williamson, a senior economist at Citigroup Inc. in Sydney who predicted today’s decision. “The currency has been the thorn in their side and the inflation data was the catalyst to act on the exchange rate concern.”

Currency Reaction

The Australian dollar fell to $1.0199 at 5:19 p.m. in Sydney, from $1.0238 before the decision. Three-year government bond yields dropped to as low as 2.47 percent, the least since Oct. 16. The benchmark S&P/ASX 200 Index (AS51) pared a loss of as much as 0.7 percent to close 0.2 percent lower.

The U.S., Europe and Japan have cut rates to a record to stimulate demand. Federal Reserve Chairman Ben S. Bernanke has kept the key U.S. rate near zero for more than four years, while European Central Bank President Mario Draghi yesterday said policy makers are ready to cut again after reducing its benchmark to a record low 0.5 percent last week.

The RBA cash rate’s previous low was 2.89 percent in January 1960, according to the central bank. Australia, which hasn’t recorded a current account surplus since 1975, typically maintains higher benchmark interest rates than other developed economies in order to attract capital inflows to offset its current account deficit.

Pre-Election Budget

The government will next week hand down its last budget before elections due Sept. 14, with a deficit of A$14.5 billion ($14.8 billion) expected this fiscal year, according to the median estimate of 10 economists surveyed by Bloomberg.

The government blames the shortfall on the strength of the local dollar that is pushing down prices and business profits, crimping tax revenue. Treasurer Wayne Swan in December abandoned a pledge to balance the books and says the government is looking for savings to fund pre-election spending announcements.