Last updated: December 4, 2012 10:42 am

Australia cuts rates to three-year low

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Sydney central business district©AFP

Australia’s central bank has cut interest rates to a level last seen during the depths of the financial crisis in an effort to boost growth in non-mining sectors of the economy.

The Reserve Bank of Australia’s move to lower its official cash rate by 25 basis points to 3 per cent comes amid evidence that Australia’s resource investment boom is peaking earlier, and at a lower level, than had been expected.

There is also evidence that activity in other parts of the Australian economy – including the construction and retail sectors – is not strong enough to offset the expected slowdown in resource investment and maintain overall growth at its trend rate of 3 per cent to 3.5 per cent a year.

“The main reason for Tuesday’s decision is quite clear,” said Stephen Walters, an economist at JPMorgan. “The RBA wants the transition between the peak in the mining investment boom and the lift in activity in non-mining parts of the economy to be as seamless as possible.”

The RBA revised its forecasts for mining investment last month, saying the peak was expected sometime in 2013 at about 8 per cent of gross domestic product, against a previous forecast of 9 per cent. However, economists believe investment – partly built on Chinese demand – could peak at just over 6 per cent of GDP by the middle of next year.

“With the peak in investment spending approaching, the need for lift elsewhere becomes all the more important,” added Mr Walters. “One way to help in this regard, of course, is to lower the cost of capital.”

Policy makers hope an increase in residential construction will keep the economy ticking over as investment in new resources projects peaks. But data released on Tuesday showed Australian building approvals fell 7.6 per cent to 12,540 units in October.

Analysts say this highlights the reluctance of consumers to take on more debt and a sclerotic planning system. Although Australia’s household debt-to-income ratio has peaked, it remains high by international standards at about 150 per cent.

In a statement accompanying Tuesday’s decision, RBA governor Glenn Stevens said recent data confirmed the peak in resource investment was “approaching” and a further easing in monetary policy was appropriate to “foster sustainable growth”.

Australia’s resources boom has been largely dependent on commodities demand from China. But the Chinese economy has slowed for seven straight quarters and, although it is staging a mild recovery now, few expect it to return to the 10 per cent growth it averaged over the past decade. Moreover, as China promotes consumption as a bigger driver of its economy, its rate of investment growth is edging down, denting its appetite for commodities.

Official figures published last week showed mining investment in Australia rose just 2.8 per cent in the third quarter, while industry investment intentions for the year to June 2013 were revised down 8.1 per cent from the previous quarter to A$109.4bn (US$114.6bn).

Several large resource projects have either been cancelled or put on hold over the past six months. In August, BHP Billiton, the world’s largest resources company, shelved plans for a A$20bn iron ore port in Western Australia and then deferred a decision on a A$10bn expansion of its Olympic Dam mine in South Australia.

The RBA has lowered its cash rate by 175 basis points since November 2011, but activity has remained muted in the non-mining sectors of the economy partly because of the strong Australian dollar, which has hit trade-exposed industries hard and household debt levels.

Tuesday’s construction data followed a series of weaker than expected economic reports that showed retail sales had stopped rising in October after two months of gains and company profits declined 2.9 per cent in the September quarter.

On Wednesday, the government will release its third-quarter GDP figure, which is expected to show that the economy grew 3.1 per cent compared with the same quarter a year ago. That would represent a market slowdown from the 3.7 per cent recorded in the second quarter and the 4.4 per cent achieved in the January to March quarter.

“In recent days, the domestic data has deteriorated markedly. We have seen disappointments around nominal wages growth, retail sales, job ads, building approvals and even government spending,” noted Bill Evans, chief economist at Westpac Institutional Bank. “These developments . . . support our expectation that a further cut can be expected.”

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