Today the Reserve Bank of Australia announced an interest rate cut from 4.50% to 4.25%, following their move in November. The RBA cited continued interest rate cuts throughout the Asian markets.
Australia exports 70% of their goods to Asia.Last week the Peoples Bank of China (PBoC) reduced their rates by ¼ point also. China is Australia s largest trading partner.
Financial Experts also see the move as a signal of a lack of confidence in the ability of euro-zone policy makers to extract the region from its sovereign-debt crisis. This came after announcements yesterday from Sarkozy and Merkel assuring investors that they had reached agreements and would have a completely new treaty and plan of action ready for the EU Summit on December 9.
“The likelihood of a further material slowing in global growth has increased,” RBA Governor Glenn Stevens said in a statement. “China’s growth has been slowing, as policy makers there had intended. Trade in Asia is now, however, seeing some effects of a significant slowing in economic activity in Europe.”
Economists said that easing off the policy brake now will provide Australia with insurance against a full-blown disaster in Europe in the two months until the RBA board next meets in early February.
Last week, Australian Treasurer Swan announced cuts to spending and delays to government programs to keep alive his pledge to restore the federal budget to surplus by 2012-13. Mr. Swan said tighter budget settings would take pressure off interest rates.
The RBA’s continued interest-rate cuts followed third-quarter inflation numbers that signaled price pressures have eased sharply, giving the central bank confidence that its 2%-to-3% inflation target is under little threat. With reduced inflation pressures the bank was able to reduce the interest rates.
The Australian dollar (ANZ)was sharply lower after the rate cut. This morning it was trading at US$1.0188, down from US$1.0229 just prior to the announcement.
The OECD in last months report forecast Australia will continue to be one of the fastest-growing developed economies in the world in 2012. Upcoming data to be released Wednesday is expected to show growth of close to 1.0% in the third quarter.
Last week Australia reported a third quarter current-account deficit of A$5.64 billion, the second smallest in 10 years. The deficit would be even smaller if coal exports had recovered fully from floods at the start of 2011. Iron-ore exports continued to boom.