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Slowing growth brings about rate cut

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The Reserve Bank of Australia cut the official cash by 25 basis points this week, citing slowing economic and credit growth as two of the key drivers behind its decision. The decision marks the fifth time the RBA has cut rates since November last year. According to Governor Glenn Stevens, the outlook for growth in the world economy has softened over recent months. Stevens said European economic activity is contracting and growth in the US remains modest, as it is in China. "In Australia, most indicators available for this meeting suggest that growth has been running close to trend, led by very large increases in capital spending in the resources sector. Consumption growth was quite firm in the first half of 2012, though some of that strength was temporary," he said. Although inflation remains low and on trend, the RBA said the introduction of the carbon price is affecting consumer prices - and will likely do so for the next couple of quarters. Despite this, creditgrowth remains soft and the exchange rate is sitting higher than expected, especially given the decline in export prices and the weaker global outlook. "At today’s meeting, the Board judged that, on the back of international developments, the growth outlook for next year looked a little weaker, while inflation was expected to be consistent with the target," Stevens said. "The Board therefore decided that it was appropriate for the stance of monetary policy to be a little more accommodative." Interest rates were last this low in October 2009. While generally this should be good news for exporters, Ian Murray, executive director of the Export Council of Australia, said that exporters still could be facing tough times ahead. "Falling interest rates are always good news for exporters not only in terms of financing but also for the impact it should have on the Aussie dollar. However, the impact to date on the dollar has not been significant and we fear that despite further rate cuts Australia will continue to have a strong currency. That and the softening of the resources sector is not good news for the economy and the recent trade deficit could herald a weakening of export earnings for some time."

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