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RBA cuts key rate to 3 percent on subdued economic outlook

RBA cuts key rate to 3 percent on subdued labour market, below average global growth

Dec. 4 (BusinessDesk) – The Reserve Bank of Australia cut its key rate a quarter point as expected, saying there’s a risk below-average global growth slows further while at home the labour market is subdued and capital spending on resources is peaking.

The central bank lowered the cash rate to 3 percent from 3.25 percent to “help to foster sustainable growth in demand and inflation outcomes consistent with the target over time.”

The Australian dollar rose immediately after the announcement to US$1.0446 fr9om US$1.0417, while the New Zealand dollar rose to US82.29 cents, from 82.04 cents just before the RBA decision was announced.

Risks to the outlook for global growth “are still seen to the downside, largely as a result of the situation in Europe, though the uncertainty over the course of US fiscal policy is also weighing on sentiment at present,” governor Glenn Stevens said in a statement.

That’s the first time he’s made mention of the US fiscal position since his August 2 statement last year, when the US Congress stalled on agreeing to lift the debt ceiling and America’s credit rating got downgraded. Republicans and the White House are again at odds as the deadline looms for the fiscal cliff, which could stall the world’s biggest economy.

In Australia, most indicators suggest economic growth is running close to trend, with large increases in capital spending in the resources sector and “weaker conditions” in other sectors.

“Looking ahead, recent data confirm that the peak in resource investment is approaching,” Stevens said.

While private consumption is expected to grow, a return to the very strong growth of some years ago is unlikely, he said. Investment outside the resources sector remains relatively subdued and public spending is forecast to be constrained.

Stevens did note signs of improvement in the property market, with home prices rising, rental yields rising and an increase in building approvals.

Inflation is consistent with the bank’s medium-term target, at around 2.5 percent on an underlying basis, though headline inflation may briefly rise above 3 percent, partly as a result of the introduction of a carbon tax, Stevens said.

“Looking further ahead, with the labour market softening somewhat and unemployment edging higher, conditions are working to contain pressure on labour costs,” he said.

While monetary policy has become “more accommodative” over the past year, as the bank lowered the cash rate, the Australian dollar “remains higher than might have been expected, given the observed decline in export prices and the weaker global outlook,” he said.


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