2012-10-16 15:43:48Roosevelt

Mining worries sparked rate cut

The Reserve Bank cut its interest rate for the fifth time in 12 months in response to weaker commodity prices and a reduction in investment by mining companies.


The minutes of the RBA's October 2 board meeting, released today, show there were concerns about a noticeable decline in the appetite for spending by Australian resource companies.


Although the RBA made no specific reference to illustrate this, two examples could be BHP Billiton’s recent shelving of a raft of projects, including the Olympic Dam project in South Australia, and iron ore miner Fortescue Metals Group’s putting some of its projects on hold.


‘‘Notwithstanding the expectation of some recovery in prices of bulk commodities over the coming quarters, it seemed likely that mining investment would peak a little earlier and at a somewhat lower level than had previously been forecast,’’ the minutes said.


Advertisement However, the central bank did say that resource investment as a share of gross domestic product (GDP) would remain high for several year.


The RBA in October cut its interest rate by a quarter of a percentage point, to 3.25 per cent, bringing the cash rate to its lowest level since the same month in 2009.


The cut followed a quarter of a percentage point reduction in June which, in turn, followed a half a percentage point cut in May and two other quarter of a percentage point cuts at the end of 2011.


The RBA minutes also said economic growth in the coming year could be weaker than had previously forecast.


However, the board was hopeful about some of the non-mining sectors of the economy.


‘‘Dwelling investment remained at a low level in the June quarter, although there were signs of improved sentiment in the housing market more recently,’’ the RBA said.


‘‘The improvement in sentiment in the housing market had been accompanied by an increase in dwelling prices in recent months.


‘‘Household credit had been growing a little more slowly than household incomes, with members discussing the desire to pay down their debt ahead of schedule.’’


The RBA minutes gave no hint of the possibility of further rate cuts, but Governor Glenn Stevens has said, in a series of comments in recent months, that, as long as inflation stays low, there was scope to cut the cash rate to give the local economy some support in the face of a slowing Chinese economy and slow to non-existent global economic growth.


The futures market is pricing in an 80 per cent chance of an interest rate cut at the Melbourne Cup day RBA board meeting and UBS interest rate strategist Matthew Johnson said a December cut was a 50-50 possibility.