Weak global growth sparks another rate cut

The RBA has dropped the cash rate to 3.00 per cent, its lowest level in more than three years. Source: AAP

THE Reserve Bank of Australia (RBA) has cut the cash rate by a quarter of a percentage point to three per cent, its lowest level since the global financial crisis.

The previous interest rate move was a quarter of a percentage point reduction in October, and the central bank has cut the cash rate by 1.5 percentage points since November 2011.

In a statement accompanying the decision, RBA governor Glenn Stevens said global growth is expected to be below average because of the European debt crisis and the looming US fiscal cliff.

He added growth in Asia has been dampened by the slower rate of Chinese economic growth.

"Key commodity prices for Australia remain significantly lower than earlier in the year, though trends have been more mixed over the past few months," Mr Stevens said.

"The terms of trade have declined by about 15 per cent since the peak, to a level that is still historically high."

Three per cent is the lowest the RBA's cash rate has been since early October 2009, during the global financial crisis.

Mr Stevens said most indicators suggest that the Australian economy is growing around trend, led by mining investment.

"Looking ahead, recent data confirm that the peak in resource investment is approaching. As it does, there will be more scope for some other areas of demand to strengthen," he said.

The market was widely expecting an interest rate cut at the December board meeting, especially after the surprise decision to keep the rate on hold at last month's meeting.

CMC Markets chief market strategist Michael McCarthy said the central bank's comments on inflation and the high exchange rate suggested that any future cuts would be unlikely.

"Their talk of inflation rising above three per cent leaves them less room to cut," he said.

"This is the second time they've suggested that inflation is higher than the market expects it to be.

"They also point out that the terms of trade is still at high levels, and that's a key driver of the currency - I think the RBA's wondering whether cutting rates will help bring the currency down."

HSBC chief economist Paul Bloxham said the rate cut was a result of the RBA trying to "pull off a great rebalancing act".

"The RBA has cut rates to try to support a bit of rebalancing in growth," he said.

Interest rate sensitive sectors, like housing and retail, would benefit from the attempt to grow non-mining sectors, he said.

"We're looking to see the Australian economy shift from being mining focused to being driven, as we look into next year, by the other parts of the economy that have been weaker recently."

Mr Bloxham predicted that Tuesday's cut was one of the last, if not the last, in the current rate cycle.

"I think we might be close," he said.

"But we'll be watching avidly the labour force data that comes out in a couple of days' time because the labour market is a key thing that we need see stabilised before we'd be completely convinced that they might be at the end."

Commonwealth Bank senior economist Michael Workman said the RBA's statement suggested concerns about the persistently high value of the Australian dollar may have contributed to the decision to cut.

"That could be one of the reasons the RBA has decided to cut rates here - the exchange rate still hasn't shown any signs of weakening," he said.

"It is just stuck in this range of 103-105 US cents, it is just remarkable."

Mr Workman said the high value of the Australian dollar was one of the biggest negative influences on the economy.

He said the RBA was likely to cut the cash rate again in February.

"If the inflation numbers continue to show underlying numbers sitting around 2.5 per cent, with no sign of an upward trend, then they'll probably go again, especially if the currency is still around the same level."

The Australian dollar rose a quarter of one US cent after the interest rate announcement.

Easy Forex currency dealer Anthony Botros said that was because the quarter of a percentage point reduction was fully expected by the market and further interest rate cuts from the RBA looked unlikely.

"In the accompanying statement there's no signs from the central bank there would be any more rate easings in the first quarter of 2013," Mr Botros said.

"They said recent easings of late are starting to work their way through the economy and they foresee that inflation pressure will be contained in the next one to two years."

The Australian dollar was trading at 104.24 US cents at 1429 AEDT, just before the decision was announced, and rose to an intraday high of 104.58 US cents after the announcement.

If the RBA's interest rate cut was passed on in full, repayments on a $300,000 mortgage would drop, on average, by almost $47 a month.

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