“Australia’s central bank may need to cut record-low interest rates at least two more times as mining investment peaks and slowing growth in China damps exports, said Pacific Investment Management Co., manager of the world’s biggest bond fund.
With resources investment providing 60 percent of Australian economic growth last year, policy makers need to act to support other sources of domestic demand, Sydney-based portfolio managers Adam Bowe and Robert Mead said today. The Aussie dollar is still high enough to restrict the economy even after dropping to a 1 1/2-year low, they said.
“Australian and global policy rates are reconverging and the risks are that there are more rate cuts to come rather than less,” Bowe said today in a phone interview. “The single cut currently being priced in by the markets looks like it won’t be sufficient unless the exchange rate suffers a more meaningful correction than the current decline.”
The Reserve Bank of Australia indicated weak inflation gives it scope for further reductions after cutting its benchmark rate to 2.75 percent this month. Non-mining industries are struggling to take up the slack in the economy, damped by a currency that is more than 20 percent overvalued on a purchasing power basis. The government last week said the resources-investment boom may be at its peak as A$150 billion ($144 billion) of projects have been scrapped or delayed.
