Australia interest rates to go lower, for longer

Mon Aug 5, 2013 12:22am EDT
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By Wayne Cole

SYDNEY (Reuters) - As Australia contemplates life on the other side of the mining boom, the onus is very much on the country's central bank to prop up the economy by taking interest rates to historic lows and likely keep them there for a long time to come.

The Reserve Bank of Australia (RBA) holds its August policy meeting on Tuesday and is considered almost certain to cut rates a quarter point to 2.5 percent, bringing this easing cycle to 225 basis points spread over 21 months.

Market rates have already baked in another move to 2.25 percent by Christmas and there's no hint of a tightening priced in for at least the next two years.

"2014 will be a long year for the economy and a cash rate even lower than our 2.25 percent forecast is now a distinct possibility," said Alan Oster, group chief economist at National Australia Bank.

That outlook has been clearly reflected in government bond yields, with the cost of borrowing out for one year hitting an all-time low of 2.24 percent on Monday. Even two- three- and four-year yields are under the cash rate.

In large part, Australia is a victim of its own good fortune. Its embarrassment of natural resources were just what China needed to fuel its growth miracle leading to a truly massive boom in mining.

As a result, mining investment has quadrupled as a share of the economy but now looks to have peaked. Having risen so rapidly the risk is that spending could fall quite sharply from quarter to quarter, taking chunks out of economic growth.

It is even possible that it could cause two consecutive quarters of contraction, the technical definition of recession, something Australia has not suffered for more than 20 years.   Continued...

A bucket wheel reclaimer is moved into position at BHP Billiton's iron ore loading facility in Port Hedland, about 1,600 km (994 miles) north of Perth May 31, 2008. REUTERS/Tim Wimborne