SYDNEY, Sept 4: Australia’s central bank held interest rates at 3.5 per cent for a third straight month on Tuesday saying past cuts had yet to be fully felt, though it did concede the outlook for China was becoming more uncertain.
The Reserve Bank of Australia (RBA) ended its September policy meeting sounding cautiously upbeat on the domestic economy, but did note that prices for some key resource exports had fallen sharply in recent weeks.
Crucially there was a hint of doubt on the outlook for China, Australia’s single biggest export market.
‘Growth in China remained reasonably robust in the first half of this year, albeit well below the exceptional pace seen in recent years,’ said RBA Governor Glenn Stevens. ‘Some recent indicators have been weaker, which has added to uncertainty about near-term growth.’
The slowdown in China has caused steep falls in prices for major exports like iron ore and coal and pressured miners into cutting back on ambitious expansion plans.
Earlier today, Fortescue Metals Group cut its planned investment spending for fiscal 2013 by 1.6 billion dollars to $4.6 billion, blaming uncertainty over iron ore prices.
The Fortescue news initially shoved the Australian dollar down to a five-week trough of $1.0224, before it later steadied at $1.0260.
A drop in the currency should actually please the central bank as its persistent strength has sat at odds with the weakness in the country’s commodity prices.
The RBA has stood pat since cutting its cash rate by 75 basis points over May and June. But investors have long been wagering it will have to ease further, largely to offset the drag on global growth from Europe and China.
‘For us the only thing of significance was the softening of its assessment of China and Asia where they talked about some weaker recent indicators in China and weaker Asian growth,’ said Su-Lin Ong, a senior economist at RBC Capital Markets.
‘There doesn’t seem to be any real urgency, but we are still looking for a cut before year end.’
Interbank futures <0#YIB:> put a 60 percent probability on a move in October and are more than fully priced for a cut to 3.25 percent in November. Overnight indexed swaps, which show where the market thinks the cash rate will be over time, put rates at 2.87 percent in 12 months.
Yields on Australian 10-year bonds are down at 3.00 percent, so it is cheaper for the government to borrow for a decade than banks to borrow overnight.
Market speculation about a cut has only been heightened by the slide in prices for spot iron ore, Australia’s single biggest export earner at over A$60 billion a year.
Prices for the steel-making mineral have tumbled by a third since early July <.IO62-CNI=SI> to reach a three-year low of $88.70 a tonne last week. That has led some miners to shelve plans for more marginal projects and generated much media gloom about an end to the seven-year old mining boom.
Q2 GROWTH STILL LOOKING OK
While some commodity prices have been falling, the country has been selling more of the product, and it is export volumes that matter when measuring inflation-adjusted gross domestic product (GDP).
Data out on Tuesday showed export volumes rose 3 percent in the second quarter to add 0.3 percentage points to economic growth. The country’s current account deficit, the broadest measure of trade and investment flows, narrowed to A$11.8 billion, from A$13 billion in the first quarter.
Combined with resilience in household spending and business investment, analysts still expect a robust reading on economic growth for the second quarter due out on Wednesday.
Forecasts are for a rise of 0.7 per cent in the second quarter, on top of the first quarter’s resounding 1.3 percent increase. That would leave Australia’s A$1.4 trillion of GDP 3.6 percent higher than the second quarter of last year, outpacing most of its rich world peers.
Also adding to growth was a surprisingly strong 1.9 per cent increase in government spending with investment the highest in two years. This could add almost 0.5 percentage points to GDP.
Total federal and state government spending amounts to 23 percent of annual GDP and it is the biggest employer with around 1.9 million workers.
Still, fiscal policy is being steadily tightened as the Labor government strives to return the budget to surplus by June 2013, years if not decades before many other rich nations.
(AGENCIES)
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