Glenn Stevens's backflip Tuesday on a declared "period of rate stability'' reflects an acknowledgement that Australia is no longer different to the rest of the world.
Stevens cut rates by a quarter point to a new record low of 2.25% today as his economy is on track to record below-potential growth for the sixth year of the past seven -- expanding less than the 3.3% average of the past 30 years, when Australia began freeing up markets and
lowering trade barriers. Unemployment has also remained above 6% for the longest stretch since 2003, when the nation's China-fueled mining boom began.
Demand from China, along with fiscal stimulus and interest-rate cuts, helped keep Australia expanding throughout the global financial crisis that tipped the world into its worst postwar recession. That's changed.
"China isn't there this time to bail Australia out of weakness, unlike 2009,'' said Katrina Ell, an economist at Moody’s Analytics in Sydney. "The RBA has had to step up to the plate and do the heavy lifting this time.''
Australia's government is also trying to narrow its budget deficit and has limited scope to bolster demand this time.
Stevens's turnaround today is all the more startling, given less than two months ago he reiterated his stance that they should remain on hold, saying: "I don’t think we see many people at all saying, `Look, the cost of money is too high,' or, `I can’t get money'," in a Dec. 12 interview with the Australian Financial Review.
The decision to end a 17-month pause was spurred by tumbling commodity prices and the run of below-trend growth that is likely to drive unemployment even higher.
The biggest advantage for Stevens, who has 18 months until the end of his term, is that unlike some developed-world counterparts, he still has 225 basis points to play with.