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Australian central bank cuts rates to record low

An office worker walks past the Reserve Bank of Australia (RBA) building in central Sydney April 2, 2013. REUTERS/Daniel Munoz
An office worker walks past the Reserve Bank of Australia (RBA) building in central Sydney April 2, 2013. REUTERS/Daniel Munoz

By Wayne Cole

SYDNEY (Reuters) - Australia's central bank cut its main cash rate by a quarter point to a record low of 2.5 percent on Tuesday as it tries to prepare the economy for life after the mining boom.

The Australian dollar edged up on the news as the market had considered it almost certain the Reserve Bank of Australia (RBA) would cut rates at its monthly policy meeting.

"The Board has previously noted that the inflation outlook could provide some scope to ease policy further, should that be required to support demand," RBA Governor Glenn Stevens said in a brief statement.

"At today's meeting, and taking account of recent information on prices and activity, the Board judged that a further decline in the cash rate was appropriate."

This was the eighth move in an easing cycle that began back in November 2011 and takes rates below the depths hit during the global financial crisis.

Markets have already baked in another move to 2.25 percent by Christmas and there is no hint of a tightening priced in for at least the next year.

That outlook is reflected in government bond yields, with the cost of borrowing out for one year hitting an all-time low of 2.24 percent this week. Even two- and three-year yields are under the cash rate.

In large part, Australia is a victim of its own good fortune. Its embarrassment of natural resources were just what China needed to fuel its growth miracle, leading to a truly massive boom in mining.

As a result, mining investment has quadrupled as a share of the Australian economy but now looks to have peaked. Having risen so rapidly the risk is that spending could fall quite sharply from quarter to quarter, taking chunks out of economic growth.

The RBA has been seeking to enliven the rest of the economy with lower borrowing costs but consumers and business have been slow to respond. Households favor saving over borrowing, while business confidence is low and political uncertainty high ahead of a federal election next month.

The government is in no position to provide fiscal stimulus, having slashed its revenue projections by A$33 billion over four years to reflect slower economic growth.

WELCOMING A LOWER A$

The prospect of lower rates has dragged the Australian dollar down over 15 percent against its U.S. counterpart since April. On Tuesday, the currency was at $0.8950, having hit a three-year low on Monday.

Yet the fall has been welcomed by policymakers as it eases competitive pressures on domestic industry while boosting profits for miners who price their product in U.S. dollars.

Analysts estimate every U.S. cent it falls adds around A$100 million to the bottom line for BHP Billiton .

"It is possible that the exchange rate will depreciate further over time, which would help to foster a rebalancing of growth in the economy," the RBA's Stevens said on Tuesday.

The long run-up in mining investment is also lifting export volumes, a trend that has years to run. Figures out Tuesday showed the country boasted a trade surplus of A$602 million in June, the fifth straight month of surpluses.

Lower mortgage rates are also feeding though to the housing market. The Australian Bureau of Statistics reported house prices jumped 2.4 percent in the second quarter, the biggest gain in over three years.

Immediately after the RBA move, National Australia Bank became the first of the four major banks to announce a 25 basis-point cut in mortgage rates.

Fortunately prices more broadly remain benign, providing the RBA with plenty of room to ease as needed. Inflation ran at 2.4 percent last quarter, well within the RBA's long-term target band of 2 to 3 percent.

That is a major departure from previous experience for Australia, as almost every other mining boom has ended with runaway inflation which necessitated a severe tightening in policy and led inexorably to recession.

(Editing by John Mair)

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