THE Reserve Bank has cut interest rates to the lowest point since the 2009 financial crisis amid concern that the mining investment boom will peak sooner and lower than expected. It is on standby to cut rates again at its next meeting on Melbourne Cup Day.
Iron ore and coalmining companies have told the bank they are putting investment plans on ice sooner than expected because they can no longer be certain prices will stay high. They say the rebound in prices in the past month gives them little comfort because they cannot be confident they will not slide again.
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RBA cuts interest rate to 3.25%
BusinessDay reporter Chris Zappone looks at the key factors influencing the Reserve Bank's decision to cut interest rates.
The September commodity price reading the bank released late yesterday shows the Australian dollar prices of exports have slid 18 per cent during the past 12 months.
The bank has brought forward its estimate of the peak in mining investment from 2013-14 to 2013. It believes the economy will need stimulus as mining investment falls and the right time to start providing it is now, given the long lead times involved in boosting activity.
The 0.25 point cut will take the bank's cash rate to 3.25 per cent, the lowest since October 2009 and 0.25 points above the level at which it stayed for six months during the financial crisis.
The bank will be guided by investment intentions, global economic developments and the strength of the currency in deciding whether to cut again next month.
Although it is not reducing rates to cut the dollar, it believes the stubbornly high dollar is depriving Australia of export income it would have expected as the dollar fell in line with plunging commodity prices.
The dollar slid US0.60¢ to a low of $US1.0295 on the news. The sharemarket gained 1 per cent.
If fully passed on, the cut will slice another $47 off the monthly cost of servicing a $300,000 loan. The Reserve's four most recent reductions - in November, December, May and June - have cut a total of $190 from monthly repayments.
The Treasurer, Wayne Swan, said the cut meant a family with a $300,000 mortgage would pay about $4500 less a year than when the Coalition left office.
"It's a welcome dividend from responsible budget management. It is good news for families and small businesses,'' he said.
The shadow treasurer, Joe Hockey, said rates was now only one step away from what Mr Swan had previously described as the "emergency levels" needed during the global financial crisis.
"The Reserve Bank is no longer as confident about the outlook for growth," he said. "I have been warning for some time Australia can no longer rely on record high commodity prices to boost economic growth and the budget bottom line."
Mr Swan appealed to banks not to "crib" or "crimp" something from the cut. The Bank of Queensland was the first to respond, passing on only 0.20 points of the 0.25 point cut. The big four are yet to announce their decisions.