Australia's central bank cuts key interest rate to 3.75 pct amid lacklustre economic growth

SYDNEY – Australia’s central bank slashed its benchmark interest rate by half a percentage point on Tuesday, a larger-than-expected cut that comes amid a slump in the housing market and lacklustre growth in the nation’s economy outside the booming mining sector.

The decision by the Reserve Bank of Australia to lower the official cash rate to 3.75 per cent follows the release last week of relatively weak inflation data. Economists had widely predicted a cut of only a quarter percentage point. The last interest rate cut was in December.

“This decision is based on information received over the past few months that suggests that economic conditions have been somewhat weaker than expected, while inflation has moderated,” Reserve Bank Governor Glenn Stevens said in a statement.

Last week, the Australian Bureau of Statistics released figures showing the annual inflation rate to March was 1.6 per cent, down sharply from 3.1 per cent a year earlier. The reserve bank’s target inflation rate for the year was 2 to 3 per cent.

The bank cited the inflation data and a subdued housing market as reasons behind its decision. Stevens also noted slowing growth in the world economy, singling out the more moderate pace of growth in China and continuing tough conditions in Europe.

Sales of new homes fell to their lowest level in more than a decade in March — dropping 9.4 per cent from a month earlier, the nation’s Housing Industry Association said in a statement Monday. Housing prices in the country’s capital cities for the first quarter of 2012 were down 4.5 per cent from the same period a year ago, the statistics bureau reported.

The housing association’s chief economist, Harley Dale, had called for the bank to cut rates by half a percentage point.

“The Bank needs to send a clear signal that it is back on the case of assisting an economy that is clearly weaker than it anticipated in 2012,” Dale said.

Australia’s economy stayed strong throughout the global financial crisis thanks to a mining boom largely fueled by China’s demand for iron ore, coal and natural gas. But the mining boom has also strengthened the Australian dollar, which is pressuring industries outside the resources sector such as agriculture, tourism and manufacturing.

Treasurer Wayne Swan praised the bank’s decision.

“It’s very welcome, it is well-deserved and it is certainly much needed by households under financial pressure,” Swan told reporters in the nation’s capital, Canberra.

Michael Blythe, chief economist with Australia’s Commonwealth Bank, said the central bank was likely hoping to provide “a positive shock to consumer and business confidence by doing a bit more than people were expecting.”