Australia cuts key rate to 3.5%

The Reserve Bank of Australia has cut its benchmark interest rate by a quarter percentage point to the lowest since 2009 as Europe’s debt crisis and slower Chinese growth overshadowed a stronger domestic labor market. Governor Glenn Stevens and his board lowered the overnight cash rate target to 3.5 percent, the central bank said in a statement in Sydney today. "More recent indicators suggest further weakening in Europe and some further moderation in growth in China," Stevens said in the statement. "Conditions in other parts of Asia have largely recovered from the effects of last year’s natural disasters, but the ongoing trend is unclear and could be dampened by slower Chinese growth," he added. The local currency and stocks maintained earlier advances after Stevens’s second rate reduction in as many meetings. Australia’s economy is giving mixed signals with unemployment at a one-year low of 4.9 percent and a A$500 billion ($488 billion) investment pipeline driving growth in some regions, even as export prices have slumped, building approvals dropped and retail sales weakened. The Australian dollar bought 97.64 US cents at 2:44 pm in Sydney from 97.34 cents immediately before the decision was announced. The S&P/ASX 200 Index held earlier gains, rising 1.1 percent to 4,029.10 at 2:47 pm Sydney time. In his statement, Stevens noted the job market’s improvement. "Overall labor market conditions firmed a little, notwithstanding job shedding in some industries, and the rate of unemployment remains low," Stevens said. "Nonetheless, both households and businesses continue to exhibit a degree of precautionary behavior, which may continue in the near term." Reflecting the weakness in the global economy, Qantas Airways Ltd. shares plunged to a record low in Sydney today after saying annual profit may fall as much as 91 percent because of losses on overseas routes and higher fuel costs. Australia’s largest carrier, which listed in 1995, slumped as much as 18 percent. Stevens last month lowered the benchmark by a half percentage point, and minutes of the meeting showed that the RBA’s decision on the size of the cut reflected a need for lower consumer borrowing costs. Australia’s four biggest banks are trying to guard margins against further erosion from elevated wholesale funding costs, by passing through less of the central bank’s rate reductions to mortgage holders. The RBA, in its quarterly monetary policy statement released May 4, cut growth and inflation forecasts. It predicted average growth of 3 percent in 2012, down from a February estimate of 3.5 percent. Consumer prices will rise 2.5 percent in the year to December, from a previous prediction of 3 percent; underlying inflation is forecast at 2.25 percent from a previous estimate of 2.75 percent, the RBA said.