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

“Lower interest rates are playing a very important part in our economy at the moment, to help us make the transition from resource-sector growth through to non-mining sector growth,” Swan told reporters in Canberra today. “The higher dollar is putting profound pressure on all sectors of the economy, particularly on the profitability of businesses, and then that of course flows right through to government revenue.”

Australia’s currency, which didn’t rise above 85 U.S. cents between 1990 and 2006, hasn’t dropped below that level in almost three years. Its record 10-month stretch above parity with the greenback is damping import costs, helping keep inflation below the middle of the range targeted by the RBA.

Currency Factor

“The exchange rate seems to have been a factor,” said Dominic Bryant, senior Asia economist for BNP Paribas SA in Hong Kong who predicted the cut. “The downward move in commodity prices has finally tested their patience.”

Australia’s economy has been powered by a once-in-a-century resource investment boom to meet demand in China. The central bank reiterated today that “with the peak in the level of resources sector investment likely to occur this year, there is scope for other areas of demand to grow more strongly over the next couple of years.”

Traders are betting Stevens will hold rates next month before cutting the benchmark at least once in the third quarter, according to data compiled by Bloomberg from interbank cash-rate futures. The contracts show a 68 percent chance he will hold at 2.75 percent on June 4, while the September futures indicate the rate will be 2.5 percent or lower by then.

Europe Data

“It appears that the RBA sees some residual ability to cut rates again,” Commonwealth Bank of Australia (CBA) Economist Gareth Aird said in a research report. “At this stage, a rate cut to 2.5 percent in August following the release of the Q2 CPI would look the most appropriate time.”

Elsewhere in Asia, consumer prices in the Philippines (PHC2II) increased 2.6 percent in April from a year earlier, less than economists’ forecast. In Europe, data is expected to show that German factory orders and French industrial production declined in March. In the U.S., job openings data for March will be released.

Australian job advertisements dropped for a second month in April and the unemployment rate jumped to 5.6 percent in March as employers shed 36,100 jobs.

General Motors Co. (GM)’s Holden division announced last month it will cut about 500 positions in Australia, saying the local dollar and currency devaluations in competing markets had made operations in the nation among the most expensive in the world.

The central bank added to 50 basis points of cuts in late 2011 and another 125 basis points in 2012 as past reductions have less of an impact than in prior easing cycles.

Slower Reaction

“It is now over 18 months since the RBA started to cut,” Citigroup said in a May 3 note to clients. “Despite this, only two of our 12 indicators currently are performing stronger” than they did when the RBA lowered rates in 2001.

The year-on-year growth in owner-occupied housing loans has slowed to 3.9 percent, the weakest pace since records began in 1991, according to central bank data.