Asian slowdown 'main threat to Australia'

Australia's Reserve Bank has left monetary policy settings on hold

By CNN's Grant Holloway

SYDNEY, Australia (CNN) -- A sharp fall in manufacturing production in Asian countries is a major threat to Australia's otherwise resilient economy, the nation's central bank warned Monday.

Major Asian economies such as Japan, Korea, Singapore, Malyasia and Taiwan were now all being affected by the slump in information technology investment which had begun in the U.S. and spread to Europe, the Reserve Bank of Australia said in its quarterly report.

As these countries were Australia's major trading partners, the main downside risk to the countiry's economic growth prospects now came from abroad, it said.

The contraction in U.S. manufacturing was the sharpest in 10 years, and it was only expanding consumer spending there -- aided by tax cuts and rate cuts -- which was preventing the U.S. from sliding into recession.

Australia, in contrast, had a firmer short-term outlook which was reflected in higher levels of business and consumer confidence despite an increasing unemployment rate.

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The bank indicated it would maintain a neutral interest rate setting in the current uncertain circumstances, with keeping inflation in check still the primary goal of its monetary policy.

Australia's key official interest rate set by the bank is now 5 percent.

The bank predicted core inflation would be about 3 percent annually in the short term before falling to 2.5 percent through next year.

Most Australian market economists now expect interest rates to remain steady for a long period before perhaps increasing some time next year.

The Australian sharemarket took the bank's statement calmly, with the S&P/ASX 200 index trading 12.7 points lower in late afternoon business at 3388.6, mirroring the subdued activity across the Asia region.

The Australian dollar was steady through Monday, buying 51.64 US cents and 63.11 yen.