Tuesday 1 May 2012

RBA cash rate cut ups pressure on banks


SYDNEY—Australia's slowing economy was given a shot in the arm Tuesday when the central bank cut a hefty half-percentage point from official interest rates, signaling a shift in its focus away from fighting inflation and toward safeguarding growth amid an uncertain global outlook.


Growth in the world economy slowed in the second half of 2011, and is likely to continue at a below-trend pace this year," said Glenn Stevens, governor of the Reserve Bank of Australia, in a statement following the decision to lower the official cash rate to 3.75%, its lowest since early 2010. "Growth in China has moderated, as was intended, and is likely to remain at a more measured and sustainable pace in the future."


Australia's economy depends greatly on resource exports to China, the country's largest trading partner. In the first quarter, China's economy grew 8.1%, its slowest rate in three years.


Mr. Stevens said that inflation, which was spurred last year by the mining boom and a series of natural disasters that pushed up food prices, has eased to a lower-than-expected level and is likely to remain within the bank's target range of 2% to 3% for the next two years. That gives the RBA scope to focus on helping segments of the economy, such as real estate and manufacturing, that have suffered from higher interest rates and the persistent strength of the Australian dollar even as the mining industry has prospered.


Although the forecast-beating cut was widely welcomed, business leaders called for even deeper rate cuts, saying they are necessary to get the economy back on track, according to The Australian.


"One rate cut is not enough to turn around confidence," Stockland chairman Graham Bradley said, according to the newspaper. "People are scared about their jobs, so what we need to see is a trend emerge. If the RBA was confident the banks would have passed on all of a 25-basis-point move I think they would have done two cuts of 25 basis points, but they weren't confident of that happening."


Mr Bradley, who is also chairman of HSBC Australia, also called on commercial banks to pass on most of the 50-basis-point cut, according to The Australian.


All 16 economists surveyed by AAP last week expected the RBA to cut the cash rate at its May 1 board meeting.


In a statement accompanying the decision, RBA governor Glenn Stevens said growth in the world economy slowed in the second half of 2011, and is likely to continue at a below-trend pace this year.


"A deep downturn is not occurring at this stage, however, and in fact some forecasters have recently revised upwards their global growth outlook," Mr Stevens said.


"Conditions in Europe remain very difficult, while the United States continues to grow at a moderate pace.


"Commodity prices have been little changed, at levels below recent peaks but which are nonetheless still quite high.


"Australia's terms of trade similarly peaked about six months ago, though they too remain high."


Mr Stevens said financial market sentiment had improved this year and that capital market are supplying funding to corporations and well-rated banks.

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