Australia cuts lending rate as mining boom slows

October 3, 2012

In response to falling prices in some commodities, the Reserve Bank of Australia (RBA) surprised economists in early October by cutting its benchmark lending rate by 25 basis points to 3.25 percent, a level last seen in late 2009 while the global financial crisis was still playing out. The move was seen as yet more evidence that the mining investment boom could be coming to an end.

Australia’s mining industry has already suffered a number of set backs because of lower commodity prices and softening demand from China. BHP Billiton’s Olympic Dam project is the largest of seven major projects or expansions that have put on hold in recent months, Rio Tinto and Fortescue Metals have also announced stoppages. On Oct. 3, Boart Longyear, the world’s largest provider of drilling services for mineral exploration, forced out chief executive Craig Kipp, as the company battles a slowdown in mining investment that has contributed to a share-price plunge.

“Looking ahead, the peak in resource investment is likely to occur next year, and may be at a lower level than earlier expected,” RBA Governor Glenn Stevens said in a statement accompanying the bank’s decision to lower lending rates. “As this peak approaches, it will be important that the forecast strengthening in some other components of demand starts to occur.”

Nine out of 12 economists surveyed by The Wall Street Journal after the RBA’s decision said they expect one more rate cut later this year.
Joshua Williamson, an economist at Citigroup, told Dow Jones Newswire that the cut was intended mainly to boost the construction industry and help retailers in the run-up to Christmas. He said he didn’t think the RBA was acting in any sort of a panic.

The RBA joins central banks in other parts of the developed world, including the U.S. and Europe, in acting to support its economy with added stimulus. The bank already has cut interest rates by 1.50 percentage points since November 2011 as its anxiety over the state of the domestic and global economy has deepened.

Of particular concern has been weakening growth in China, Australia's biggest trading partner.

The soaring Australian dollar also was central to the RBA’s decision to cut. While prices for key raw material exports such as coal and iron ore have slumped in recent months, the currency has remained elevated--making life tougher for manufacturers and other exporters whose products have become globally less competitive.

The RBA separately said its index of commodity prices had fallen by 18.5 percent in Australian dollar terms in the year to September. The government’s chief commodities forecaster last month cut its forecast for revenue from energy and minerals exports in the current fiscal year by 20 billion Australian dollars.

The price of iron ore, which accounts for about 20 percent of Australia's exports, is 30 percent below its 2012 peak in April, and down about 46 percent from its record high in February 2011. Coal, which accounts for around 10 percent of exports, is languishing around 3-year lows.



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