The Reserve Bank of Australia (
) cut its benchmark interest rate, the overnight cash-rate
target, by 0.25% to 3.25% on Tuesday, effective tomorrow. The
Australian dollar immediately weakened against other major
currencies, falling 53 pips against the US dollar and losing 104
pips against the euro.
RBA Governor Glenn Stevens issued a statement on today's
decision in which he said, "The outlook for growth in the world
economy has softened over recent months, with estimates for
global GDP being edged down, and risks to the outlook still seen
to be on the downside."
The RBA had been forecasting a soft landing in China for some
time but changed its tune in today's 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."
Chinese demand for Australian resources is a key component of
growth. Prices for Australian iron ore and coal, both thermal
coal used in power plants and metallurgical coal used to make
steel, have been declining due to slower growth in China.
Bloomberg notes, "A quarter of Australia's exports, making up
about 5 percent of gross domestic product, goes to China, and 60
percent of those shipments are iron ore."
"Key commodity prices for Australia remain significantly lower
than earlier in the year, even though some have regained some
ground in recent weeks," Stevens' statement continued, "The terms
of trade have declined by over 10 per cent since the peak last
year and will probably decline further, though they are likely to
remain historically high."
Since mining and other resources make up such a large part of
Australia's economy, a prolonged period of stagnant demand and
declining prices will have a big impact on overall economic
activity. "…growth has been running close to trend, led by very
large increases in capital spending in the resources sector," the
RBA statement continued. "Looking ahead, the peak in resource
investment is likely to occur next year, and may be at a lower
level than earlier expected. As this peak approaches it will be
important that the forecast strengthening in some other
components of demand starts to occur."
The RBA rate cut is intended to boost consumer demand, in
particular. Virtually all home mortgages in Australia have
floating interest rates based on the RBA's overnight cash-rate
target. Australian banks have been under pressure to pass along
lower rates to their mortgage customers but they have been
reluctant to do so. Today's 0.25% cut is the fifth RBA cut since
November 2011, according to The Australian newspaper, with the
benchmark 1.25% lower than it was a year ago.
The Bank of Queensland announced that it will cut its mortgage
rate by 0.20%. "Given the continuing pressure on the cost of
funding a 20 basis point reduction is the best balance between
our customers and shareholders," Bank of Queensland chief
executive Stuart Grimshaw said. Other major Australian banks are
expected to follow suit.
The RBA hopes that by cutting interest rates, consumers will
have more money to spend as their mortgage payments decline. It
is also hoped that lower interest rates will stimulate
Investors can trade the Australian dollar through the
CurrencyShares Australian Dollar Trust (Nasdaq:
) ETF. Prior to the market open, the bid-asked is 103.09 to
103.12 compared to Monday's close of 103.70. There is support for
FXA at the 500-day simple moving average (103.04) and, if that
support is broken, there is additional support around the
September 5th low of 101.80.
(c) 2012 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.