Australia's central bank cut interest rates a quarterpoint to a record-matching low on Tuesday,stepping up efforts to safeguard the rich world'smost resilient economy from the risk of recession as a mining boom peaks.
The Reserve Bank of Australia (RBA) cut its main cash rate to 3.0 percent following its monthly policy meeting, bringing the easing since May to 125 basis points and matching the trough hit during the darkest days of the global financial crisis.
"While the full effects of earlier measures are yet tobe observed, the Board judged at today's meetingthat a further easing in thestance of monetary policy was appropriate now," said the central bank's governor, Glenn Stevens.
"Looking ahead, recent data confirm that the peakin resource investment is approaching. As it does, there will be more scope for some other areas of demand to strengthen."
Financial markets were almost fully priced for an easing given signs the seven-year old bonanza inmining investment is finally likely to crest next year, leaving a hole in growth that needs to be plugged by other sectors of the economy.
The move was so well discounted the local dollar actually firmed a quarter of a cent to$1.0445 on the news.
Yet, investors are still wagering official rates will have to go lower yet to truly stimulate demand among cautious consumers and a lacklustre housing market.
Interbank futures suggestthe central bank rate could approach 2.5 percent by the middle of next year, while some economists think a floor of2 percent is not impossible.
"I think the RBA realises itneeds to do more to boostthe non-mining parts of the economy," said Shane Oliver, chief economist at AMP Capital Investors in Sydney.
"What it doesn't do is to offer much guidance as tothe future, but my feelingis they still have to cut further. They will probably do 25 (bps cut) in February and then 25 in April."
One reason for that is the stubborn strength of the Australian dollar.
In the global financial crisis, the currency tumbled by 30 U.S. cents, giving a big boost to exports. This time foreign demand for Australia's triple-A rated debt has helped it stay solidly above parity.
China has also played a part by accepting more moderate growth at homeand thus restraining demand for Australia's commodity exports, leading top miners such as Rio Tinto and BHP Billiton to announce a slowdown in future expansion plans and job cuts.
The Asian giant is Australia's biggest trade market and the single largest buyer of iron ore.
It helped Australia avoid recession during the global crisis by unveiling a 4 trillion yuan ($635 billion) stimulus package that led to a wave of infrastructure development and demand for resources.
Australia's mining investment in the year to June 2013 is expected to total A$109 billion, or nearly 8 percent of GDP, way above the long-run average of 2 percent.
CONSUMER CAUTION, FISCAL TIGHTENING
Even after Tuesday's cut, Australian rates are still among the highest in the developed world.
With rates near zero in theUnited States, Japan and Britain, those countries have taken ever more exotic stimulus steps including buying massive amounts of government debt.
And, as yet, lower rates have had only a limited impact on consumers, withretail sales disappointinglyflat in October and demand growth for creditthe lowest in decades.
The housing market has also been less than stellar.The Statistics Bureau on Tuesday reported approvals to build new homes slid 7.6 percent in October, so reversing much of September's hefty 9.5 percent increase.
The impact of lower export prices was clear in Australia's trade deficit, which more than doubledin the third quarter. As a result, the current accountdeficit widened by a fifth to A$14.9 billion ($15.5 billion), according to figures from the AustralianBureau of Statistics.
Fortunately, export volumes managed to outpace imports and so add 0.1 percentage point to economic growth in thequarter.
However, that was more than offset by governmentpenny-pinching as the ruling Labor Party struggles to return the budget to surplus in 2013, years before most other rich nations.
Data out Tuesday showed government spending fellby 2.0 percent in the third quarter, largely due to a big drop in defence investment. That was a steeper fall than many analysts had expected and could take around half a percentage point from economic growth in the quarter.
It was no surprise then that Treasurer Wayne Swan warmly welcomed the RBA's largesse.
