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RBA Cuts Interest Rates to 3-Year Low

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12/04/2012 | 05:06am CET

--Central bank cuts interest rates to 3-year low

--Treasurer Swan warns on slower economic growth

--RBA 'battling' to stay ahead of mining slowdown-economists

SYDNEY--Australia's central bank cut interest rates by a quarter of a percentage point to 3.0%, matching a low hit in the aftermath of the global financial crisis, as a fading mining boom weighs on the resource-rich economy.

The Reserve Bank of Australia is attempting to rekindle demand in weaker sectors of the economy like retail and manufacturing as a boom in mining investment that has powered growth in recent times rapidly loses steam.

"Looking ahead, recent data confirm that the peak in resource investment is approaching," RBA Governor Glenn Stevens said Tuesday following a gathering of the bank's policy setting board in Sydney. The outlook for investment outside of the mining sector remains "relatively subdued," he added.

Australia's economy has been hit by sharp falls in industrial commodity prices, prompting mining companies to shutter sites and collectively shed thousands of workers. At the same time, an uncertain global outlook has meant consumers have been slow to respond to a yearlong campaign of interest rate cuts now totaling 1.75 percentage points.

"The trouble is the peak of the mining boom is coming earlier and faster than expected, at a time when the rest of the economy--housing, retailing, manufacturing and tourism--is still struggling," said Shane Oliver, chief economist at AMP Capital Investors. The RBA is "battling to get ahead of the slowdown," he added.

New figures Tuesday show building approvals for new houses and apartments fell a seasonally adjusted 7.6% in October from a month earlier, in spite of a surprise rate cut that month. House prices across eight capital cities were 0.1% lower in November than a year earlier, a private-sector survey Monday showed. Retail sales were flat in October, the latest official numbers, a tepid start to the important Christmas trading season.

Policymakers are concerned about the strong Australian dollar, which is trading up 8% since hitting its year-low in June, acting as a drag on certain areas of the economy such as tourism and manufacturing. The currency is also blamed by energy and mining companies for adding to development costs and undermining the competitiveness of Australia's crucial resource exports.

The economy likely grew at an annualized pace of 3.1% in the three months through September, according to economists surveyed by Dow Jones Newswires, slowing from 3.7% in the year through June. Official gross domestic product growth figures are due on Wednesday.

"I wouldn't be surprised if we saw a slight moderation in growth," Treasurer Wayne Swan told reporters after the RBA decision. "We do have global economic head winds and we have a high dollar, and they are clearly impacting on our economy," he added.

Economists had expected the RBA to cut interest rates Tuesday. But the absence of any commentary from the RBA on the likely future direction for rates sent the Australian dollar higher after the decision to US$1.0444 from US$1.0421 before.

Some traders interpreted Tuesday's statement as signaling the latest cut was the last for some time. Last month, the RBA held rates steady, but left the door ajar for further cuts by saying its policy stance was appropriate only for the "time being".

The RBA board won't meet again until February. That is a long hiatus for financial markets to stew over future policy, especially given the economic uncertainty in Europe, and tense political negotiations in the U.S. over how to design a deficit-reduction package.

"We can't rule out another rate cut in February if U.S. budget negotiations are still dragging on, creating the risk of a U.S. recession and a weaker global economy," said Craig James, chief economist at Commonwealth Securities.

Although the RBA's benchmark lending rate is at its lowest level since September 2009, higher funding costs stemming from the financial crisis mean commercial banks are reluctant to pass on any official interest rate cuts in full, dampening consumers' appetite for credit.

The jobs market is also softening, with the unemployment rate expected to tick up to 5.5% in November from 5.4% in October, according to economists. Official jobs figures are due on Thursday.

Write to Enda Curran at enda.curran@wsj.com

Subscribe to WSJ: http://online.wsj.com?mod=djnwires

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