"While the full effects of earlier measures are yet to be observed, the Board judged at today's meeting that a further easing in the stance of monetary policy was appropriate now," said the central bank's governor, Glenn Stevens. "Looking ahead, recent data confirm that the peak in resource investment is approaching. As it does, there will be more scope for some other areas of demand to strengthen."
Financial markets were almost fully priced for an easing given signs the seven-year old bonanza in mining investment is finally likely to crest next year, leaving a hole in growth that needs to be plugged by other sectors of the economy. The move was so well discounted the local dollar actually firmed a quarter of a cent to $1.0445 on the news. Yet, investors are still wagering official rates will have to go lower yet to truly stimulate demand among cautious consumers and a lacklustre housing market.
Interbank futures suggest the central bank rate could approach 2.5 percent by the middle of next year, while some economists think a floor of 2 percent is not impossible. "I think the RBA realises it needs to do more to boost the non-mining parts of the economy," said Shane Oliver, chief economist at AMP Capital Investors in Sydney.
"What it doesn't do is to offer much guidance as to the future, but my feeling is they still have to cut further. They will probably do 25 (bps cut) in February and then 25 in April." One reason for that is the stubborn strength of the Australian dollar. In the global financial crisis, the currency tumbled by 30 US cents, giving a big boost to exports. This time foreign demand for Australia's triple-A rated debt has helped it stay solidly above parity.
China has also played a part by accepting more moderate growth at home and thus restraining demand for Australia's commodity exports, leading top miners such as Rio Tinto and BHP Billiton to announce a slowdown in future expansion plans and job cuts. The Asian giant is Australia's biggest trade market and the single largest buyer of iron ore. It helped Australia avoid recession during the global crisis by unveiling a 4 trillion yuan ($635 billion) stimulus package that led to a wave of infrastructure development and demand for resources.
Australia's mining investment in the year to June 2013 is expected to total A$109 billion, or nearly 8 percent of GDP, way above the long-run average of 2 percent. Even after Tuesday's cut, Australian rates are still among the highest in the developed world. The housing market has also been less than stellar. The Statistics Bureau on Tuesday reported approvals to build new homes slid 7.6 percent in October, so reversing much of September's hefty 9.5 percent increase.
The impact of lower export prices was clear in Australia's trade deficit, which more than doubled in the third quarter. As a result, the current account deficit widened by a fifth to A$14.9 billion ($15.5 billion), according to figures from the Australian Bureau of Statistics. Figures for gross domestic product (GDP) are due on Wednesday and were expected to show moderate growth of around 0.6 percent in Australia's A$1.4 trillion economy.