Australian Central Bank Cuts Key Interest Rate

HONG KONG — The Australian central bank dropped its key interest rate to a record-low 2.75 percent Tuesday, becoming the latest central bank in recent weeks to try to stimulate growth.

Few analysts had expected the central bank, the Reserve Bank of Australia, to deliver a rate cut at its policy meeting, and the reduction, by a quarter of a percentage point, prompted the Australian dollar to decline about half a cent against the U.S. dollar, to $1.019.

In a statement accompanying the rate decision, Glenn Stevens, the central bank’s governor, struck a sanguine note about the global economy, saying it was “likely to record growth a little below trend this year before picking up next year,” with the United States currently on a path of moderate expansion and China’s growth running at a robust pace. And although commodity prices — which are important to resource-rich Australia — have moderated in recent months, they “remain high by historical standards,” he added.

Still, unemployment has edged up despite a string of rate cuts in recent years, and investment in mining, a major source of economic activity, is projected to peak this year.

A persistently strong Australian dollar has weighed on the economy. The currency has climbed against the U.S. dollar for much of the past 12 years, with only a brief slump after the Lehman Brothers collapse in late 2008, and reached parity with the U.S. dollar for the first time since 1982 in late 2010. It has been worth more than $1 for much of the time since then.

The exchange rate’s strength over the past 18 months, Mr. Stevens said, “is unusual, given the decline in export prices and interest rates during that time.” The central bank thus decided that “a further decline in the cash rate was appropriate to encourage sustainable growth in the economy,” he continued.

The fact that inflation in Australia, at 2.5 percent during the first quarter of this year, remains within the central bank’s comfort level also provided the leeway for a reduction in interest rates, analysts said. The rate cut Tuesday was the seventh by the Australian central bank since November 2011 and took the total reduction in borrowing costs to 2 percentage points.

“Further easing looks unlikely at the moment,” analysts at Standard Chartered said in a research note, adding that the central bank was likely to wait for more data before making further moves. “However, continued sluggishness in both the domestic and global economies will increase the risk of a rate cut, inflation permitting,” they said.

The Australian move follows recent efforts in several other regions and countries to prop up growth. Both the European Central Bank and the Reserve Bank of India lowered borrowing costs last week in a bid to bolster growth, which has been flagging. And in Japan, the central bank and the government have announced spending plans and asset purchases and have promised measures to attract investment in an effort to combat deflation and reignite growth.

Article source: http://www.nytimes.com/2013/05/08/business/global/australian-central-bank-cuts-key-interest-rate.html?partner=rss&emc=rss