RBA cuts cash rate to 3.25pc

THE Reserve Bank cut interest rates today for the third time this year amid mounting concern China’s slowing economy will sap demand for Australia’s most valuable exports.

Although Australia’s economy grew rapidly over the year to June and unemployment fell to 5.1 per cent in August, the Reserve Bank cut official interest rates to 3.25 per cent, their lowest level since late 2009 when the global financial crisis was ravaging global economies.

Yesterday, it emerged the world’s second largest economy, China — Australia’s biggest trading partner — was suffering because of weak demand from moribund Europe and the United States. China’s manufacturing sector shrank for the seventh month in a row while Japan’s largest manufacturers reported weakening trading conditions.

After last month’s meeting of the RBA board, most economists thought local rates would stay on hold, as lending rates had fallen below their long-run levels and the employment market had shown surprising resilience.

But continued falls in commodity prices prompted by concern about Asian demand and a stubbornly high Australian dollar — which undermines the competitiveness of Australian manufacturing, retailing and tourism — tarnished that more optimistic outlook.

Nevertheless, only nine of 28 economists thought the RBA would trim rate today according to a recent survey by Bloomberg. Traders in financial markets had been much more certain, giving it a probability of 80 per cent last night.

Financial markets are pricing in at least another three quarter percentage-point rate cuts over the next 12 months, which would bring local rates to unprecedented lows.

Economists argued the RBA should wait until November when it could examine the September quarter inflation figures.

The RBA cut interest rates in May and June by 75 basis points in total, but their impact has been muted: construction activity and take-up of new loans have remained weak.

The RBA’s easing of monetary policy today follows recent announcements by the European Central Bank and the Federal Reserve, whose official interest rates have already reached close to zero, that they would create new money and lend it to banks and governments at cheap rates to help economic growth.

 

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