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Australia's economy is in for a rocky ride

The country’s central bank cut interest rates to a record low today.

AUSTRALIA’S CENTRAL BANK has cut interest rates to record lows in a bid to kickstart the country’s economy as it continues to suffer the hangover from its mining boom.

The Reserve Bank of Australia (RBA) sliced its official lending rate to 2% today, the latest in a series of reductions that started in November 2011 – when rates were at 4.5%.

The country’s unemployment rate has been creeping up from a low of about 4% in 2008 to 6.2% in March as China’s appetite for commodities like iron ore – Australia’s biggest export – waned.

Australia had been one of the few major economies to emerge virtually unscathed during the financial crisis having recorded 23 straight years of GDP growth.

4tl-gdpgrwth Source: RBA

That economic strength worked to push up the value of the Australian dollar, most importantly against the greenback as US officials slashed interest rates and unleashed a money-creating quantitative easing programme to get the world’s biggest economy going.

But Australia has been struggling to maintain employment and wage growth since China’s unprecedented building binge came to an end.

High dollar woes

During the mining boom, the high Australian dollar hit the competitiveness of other industries like manufacturing hard as they battled to compete with cheap imports. The country’s car-making industry, for example, was pushed to extinction.

However since the RBA started cutting interest rates, the Australian dollar has lost about 20% of its value against the US dollar – a trend which the central bank hopes will continue.

dollar Source: Xe.com

Further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices,” RBA governor Glenn Stevens said today.

Meanwhile, growth in employment and consumer spending are expected to pick up, but both businesses and the government have been reluctant to open the purse strings – meaning the outlook for jobs was still hanging in the balance.

The economy is … likely to be operating with a degree of spare capacity for some time yet,” Stevens said.

- With AFP

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About the author:

Peter Bodkin  / Editor, Fora

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