RBA cuts key rate a quarter point to 4.5% as inflation eases

Australia's central bank cuts key rate a quarter point to 4.5% as inflation eases

Nov. 1 (BusinessDesk) - The Reserve Bank of Australia cut its benchmark interest rate as expected, saying early fears of resurgent inflation hadn't borne out and the global economy was cooling.

The RBA cut the cash rate 25 basis points to 4.5 percent, still 2 percentage points above New Zealand's, at its meeting today.

The central bank said there was "moderation in the pace of global growth, though fears of a major downturn have not been borne out so far." The US economy had spare capacity and China had succeeded in slowing that nation's rampant growth.

Trade is now feeling the effects of "significant slowing" in the economy of Europe, which has been the epicentre of concerns about a faltering global economy. Coupled with that commodity prices had declined.

Signs of economic recovery, though, had lifted the Australian dollar recently as risk aversion receded. A strong currency had then helped mitigate the effects of imported inflation, the bank said.

"It is likely to be some time yet before concerns about the European situation can definitively be laid to rest and the effects of the recent turmoil on confidence may result in a period of precautionary behaviour by firms and households," Governor Glenn Stevens said in the statement.

He said recent data showed the Australian economy's pace was "moderate". He identified the two legs of the economy - a vibrant resources sector and a struggling manufacturing, non-resource economy including households.

Inflation had subsided as an issue he said.

"CPI inflation on a year-ended basis remains above the target, due to the effects of weather events last summer, but is now starting to decline as production of key crops recovers," Stevens said. "With labour market conditions now softer, the likelihood of a significant acceleration in labour costs outside the resources and related sectors in the near term has lessened."

The RBA sees inflation in 2012 and 2013 consistent with the 2–to-3 percent target in 2012 and 2013, excluding carbon levies.

Borrowing rates in Australia were "still a little higher than average" with little growth in credit.

The Australian dollar fell to US$1.0484 from US$1.0522 immediately before the RBA's statement. The New Zealand dollar climbed as high as 77.07 Australian cents after the RBA statement, from 76.64 cents immediately before.

(BusinessDesk)

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