U.S., Asian woes prompt third Aussie rate cut

Falling currency value still a concern

In this story: Sharp decline in housing sector Two risks to short-term growth No risk to inflation RELATED SITES

By CNN's Grant Holloway

SYDNEY, Australia (CNN) -- Australia's central bank has cited weaker East Asian economies and continuing U.S. woes as key factors prompting a third cut in official interest rates in as many months.

The Reserve Bank of Australia dropped the official interest rate by half a percentage point to 5 per cent Wednesday morning, matching the US Federal Reserve Board's key rate.

QUOTE "We can afford to cut interest rates in this economy without raising risks in relation to inflation. The economy has the capacity to grow strongly without price pressures." - Treasurer Peter Costello

Despite the removal of a margin over U.S. fixed-rate investments, the Australian dollar was initially buoyed by the cut, climbing as high as US49c shortly after the announcement. But the currency soon fell back and in mid-afternoon trading in Sydney the Aussie dollar was buying around US48.70c.

The Australian share market was similarly unimpressed, the S&P/ASX 2000 index slipping 7.7 points to 3184.6 points at 3.15pm Australian Eastern time.

Australian home buyers have reason to cheer however with all four major commercial banks -- National Australia Bank, ANZ, Commonwealth Bank and Westpac -- all reducing their retail rates for home-lending.

Cutting by half a percentage point is a relatively bold move for the RBA as retail sales figures for February, released Monday, were quite strong and the threat of further falls in the Australian dollar still looms.

These considerations have been over-ridden by the need to give a sharp boost to general confidence. The RBA said falls in business and consumer confidence had been most noticeable in the US against a backdrop of a plunging share market, and this was affecting the Australian economy.

Sharp decline in housing sector

Australian gross domestic product shrank by 0.6 per cent for the December quarter, the first decline in 10 years.

"A number of other countries, including importantly for Australia those in East Asia, have also recently shown signs of slower economic growth. World interest rates are declining in response to these conditions," the bank said.

In Australia, a sharp decline in the housing sector, while considered temporary by the RBA, was affecting the broader economy.

The sharp decline in the value of the Australian dollar -- the unit has fallen more than 13 percent against the U.S. currency this year alone -- has not yet had an inflationary affect on Australian prices, the bank said.

Two risks to short-term growth

Australian Treasurer Peter Costello says rate cut won't threaten low inflation

"The Board remains firmly of the view that the economy's medium-term growth prospects are very good, but recognizes that two risks to short-term growth exist.

"The first comes from the weaker world economy. Against this, the exchange rate gives a major competitive edge to the traded sector.

"The second risk is that, notwithstanding strong medium-term prospects for growth, confidence could weaken in such a way as to further dampen domestic demand in the short term.

"The Board views it as prudent for monetary policy to help support domestic demand under such circumstances. "

No risk to inflation

The RBA's view was backed by Australian Treasurer Peter Costello, who said the cut would not accelerate inflation.

"We can afford to cut interest rates in this economy without raising risks in relation to inflation... The economy has the capacity to grow strongly without price pressures," Costello told reporters in Canberra.

Mark Rider, chief economist, UBS Warburg told CNN that the Australian market would be "pretty satisfied" with the rate cut, although he said there was likely to be another cut of half a percentage point to come.

He said the RBA's move was positive from a currency perspective, and the Australian dollar had picked up a little since the news of the cut came through. He said it was good to see the RBA "getting on the front foot" in helping the economy.

Kieran Davies, an economist with ABN-Amro, said the bank's move was in response to growth being considerably weaker than what it was looking for.

" Plus the global outlook has become a lot less certain. I think the Reserve Bank will sit on the sidelines for a month or so, but in the end I think they'll cut further, I think the cash rate is heading towards 4.50 per cent. I'd say the third quarter by the latest," Davies said.

Grant Fitzner, senior economist with HSBC Australia said the cut would give a welcome boost to consumer confidence in Australia.

"No doubt that was one of the main aims of the decision, with the Reserve Bank having seen how confidence rebounded in the United States after the Fed cuts," he said.

Reserve Bank of Australia

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