Australia Market

Rate Cuts Seen Cushioning Australian Economy

SYDNEY—Recent interest-rate cuts by Australia's central bank are cushioning the impact of falling commodity prices on economic growth, a top executive at the country's Treasury department said Thursday.
Slowing growth in China, the country's biggest trading partner, has triggered sharp falls in industrial commodity prices in recent times, buffeting Australian exports. David Gruen, head of economic forecasting at the Australian Treasury, said there is "no question" those falling prices will dent growth and crimp government tax revenue. But after taking into account recent interest-rate cuts, the economy is tracking broadly in line with the government's May budget, Mr. Gruen added. "It has not changed very substantially."

The comments are at odds with the Reserve Bank of Australia, which has indicated it will downgrade its growth forecasts for the resource-rich economy in an update due Nov. 9. The central bank has slashed interest rates by 1.5 percentage points since November, with financial markets expecting the benchmark lending rate to fall to about 2.50% by the middle of next year as the country's crucial mining industry slows and unemployment rises. The cash rate is currently 3.25%—a three-year low.

Mr. Gruen said Thursday the RBA has scope to cut interest rates further "if it sees fit", especially as inflation remains well-contained within the bank's 2%-3% target band. The remarks, in a testimony to lawmakers in Canberra, come as the federal government is set to release its midyear budget update as soon as next week.

In May, Treasury forecast the economy would grow at 3.25% this fiscal year, slowing to 3.0% the year after. It also forecast a wafer-thin budget surplus of 1.5 billion Australian dollars, or US$1.6 billion, for the fiscal year ending June 30—a goal the government of Prime Minister Julia Gillard has staked its chances of retaining office in an election due late next year on achieving. The revenue to pay for this economic blueprint was supposed to come partly from a new tax on profits from the sale of mineral resources and higher corporate-tax receipts. But the sharp slide in commodity prices and signs of retrenchment by Australian miners over recent months has put that plan at risk. From copper mines in tropical Queensland state to big iron-ore pits in the country's west, mining companies are idling equipment and laying off workers.

In the latest example, Mount Gibson Iron Ltd.  said Thursday it was laying off about 270 workers, slowing production and cutting pay for senior managers to curb costs and help it ride out the commodity price fall.
Mr. Gruen said Thursday investment in the resources sector would likely increase by about 45% this fiscal year, down from 75% a year earlier.