The move by Australia’s central bank to lower interest rates from October 3 is the latest sign of pessimism about the prospects of the China-led resources boom.
In announcing an unexpected cut to the official cash rate by 25 basis points to 3.25 percent, the Reserve Bank of Australia (RBA) indicated that the global outlook was no longer supporting the Australian economy.
“Economic activity in Europe is contracting, while growth in the United States remains modest,” RBA governor Glenn Stevens said in a statement. “Growth in China has also slowed, and uncertainty about near-term prospects is greater than it was some months ago. Around Asia generally, growth is being dampened by the more moderate Chinese expansion and the weakness in Europe.”
Instead, it expected the nation’s resources investment boom to peak in mid-2013, six months earlier than previously forecast.
“Looking ahead, the peak in resource investment is likely to occur next year, and may be at a lower level than earlier expected,” the governor said, warning of a softening in the labor market and the impact of the strong exchange rate on exporters.
The RBA’s move came earlier than expected for most economists. A Bloomberg survey conducted beforehand showing that 19 of 28 economists polled had expected rates to stay on hold.
However, if the central bank’s aim was to drive down the Australian dollar and boost stock prices, it had an immediate impact. On announcing the decision at 2.30pm (Sydney time) on Tuesday, the Australian dollar dropped from US$1.037 to US$1.031, continuing its fall on Wednesday to reach US$1.02.
The Australian stock exchange gained 1 percent on Tuesday and reached its highest close in 14 months on Wednesday, with gains in retailers and other stocks exposed to consumer spending.
While Federal Treasurer Wayne Swan urged the banks to pass on the rate cuts to benefit “working Australians and small businesses,” Opposition treasury spokesman Joe Hockey noted that the official rate was now near its “emergency levels” of the 2008/2009 global financial crisis. “That’s not because the Australian economy is doing well, that’s because the Australian economy is doing it tough,” Hockey said.
According to Bloomberg, just over half of the 21 economists polled are now expecting another rate cut to 3 percent on November 6 – the RBA’s seventh-straight move on the day of the famous Melbourne Cup horse race and matching its crisis-time low.
Twiggy 1, regulators 0
Mining billionaire Andrew “Twiggy” Forrest might agree with Hockey’s analysis after seeing iron ore prices plunge from record levels in 2011 of nearly US$200 a ton to below half that price this year. The decline in resource prices had sparked a debt crisis at his company, Fortescue Metals Group.
On the same day that the RBA ruled on monetary policy, Forrest scored a court victory against the Australian Securities and Investment Commission (ASIC) after a six-year battle over statements concerning Chinese contracts.
The case concerned whether Australia’s No. 3 iron ore company had mislead investors over claims of “binding” contracts with three Chinese state-owned entities, which were ultimately never fulfilled. Fortescue’s shares initially rose initially after the 2004 announcement of the deals, but dropped around 25 percent in March 2005 after an Australian Financial Review report disputed the agreements.
Overturning a previous Federal Court decision and awarding costs to Fortescue, the High Court found that the parties had a genuine intention of making a legally binding agreement, to an audience of investors deemed “sufficiently tough, shrewd and skeptical”.
While grateful to have “an expensive distraction” ended, Fortescue and the rest of the resources sector may have reflected on the gloomy prognosis of Australia’s central bank.
On Wednesday, the Asian Development Bank added to the downbeat outlook by cutting its growth forecasts for developing Asia, including a near one percentage point reduction for China, to 7.7 percent from 8.5 percent.
“The global slump in demand, especially from Europe, will remain a serious drag on growth in the near term,” ADB chief economist Changyong Rhee said in a statement.
More evidence, if any was needed, of the requirement for further stimulus efforts from policymakers across the region.