Australia Cuts Rates

Australia’s central bank cut its benchmark interest rate for the first time in nearly seven years as it responded to an easing in inflationary pressure and weakening economic growth.

After cutting the official rate from 7.25 to 7 per cent, the Reserve Bank of Australia said that tight financial conditions together with higher fuel costs and lower asset values had exerted the needed restraint on demand”

However, it also acknowledged there were ”opposing forces” at work which created uncertainty over the outlook for demand and inflation.

A series of indicators in recent days have suggested the Australian economy is in much better health than expected. Until late last month, many economists had predicted a further four cuts in rates within the next seven months.

The resources boom has led to a sharp rise in exports and a sharp improvement in Australia’s current account, with the deficit dropping from A$20bn at the end March to A$12.8bn at the end of June.

While there is evidence of a slowdown in domestic spending and weaker consumer confidence, rising exports of iron ore and coking coal will boost economic growth, with figures out on Wednesday expected to show a 0.4 to 0.5 per cent increase in June quarter gross domestic product, which would take the annual total to about 3 per cent.

Government figures out on Monday highlighted the strength of company profits, with mining companies in particular reporting strong growth in earnings. Company profits increased by an incredible 14.3 per cent [in the June quarter], more than six times higher than the market expected,” said Joshua Williamson, a senior strategist at TD Securities.

The Reserve Bank on Wednesday also noted that ”fixed investment spending by businesses continues to be very strong”. Figures out last week showed businesses were expected to lift spending by about a third in the coming year, the biggest increase in more than two decades and further evidence of the resilience of the economy, which will soon commence its 18th consecutive year of growth.

Mining companies are struggling to find workers in the resource rich states of Western Australia and Queensland. However, there is also evidence that companies are laying off workers with close to 5,000 jobs being shed from some of Australia’s most well-known companies in recent weeks. These include Qantas, the airline, Fairfax Media, the newspaper publisher, and Babcock & Brown, the investment group.

The Reserve Bank said yesterday that it did not expect inflation to fall below 3 per cent until 2010. The central bank has a target inflation band of 2 to 3 per cent.

Until today there had been 12 successive interest rate rises in Australia since December 2001 when the rate was at a 4.25 per cent.

Australia Cuts Rates, Financial Times
9/2/2008 4:48:53 AM