The Reserve Bank of Australia surprised economists by cutting its benchmark lending rate by 25 basis points to 3.25%, a level last seen in late 2009 while the global financial crisis was still playing out. Most economists had expected no change.
Australia's mining industry is already feeling the pain of weakening global demand as Europe's woes play out and China's economy slows. In recent weeks, leading mining companies have scrapped big investment plans, shuttered mines and laid off thousands of workers.
"Looking ahead, the peak in resource investment is likely to occur next year, and may be at a lower level than earlier expected," RBA Governor Glenn Stevens said in a statement accompanying the bank's decision. "As this peak approaches, it will be important that the forecast strengthening in some other components of demand starts to occur."
Nine out of 12 economists surveyed by The Wall Street Journal after the decision said they expect one more rate cut later this year.
Joshua Williamson, an economist at Citigroup, said the cut was intended mainly to boost the construction industry and help retailers in the run-up to Christmas. He said he didn't think the RBA was acting in any sort of a panic.
"There's nothing to suggest that this is the start of a deep cutting cycle," Mr. Williamson said.
The Australian dollar fell sharply to an intraday low of US$1.0295 on the news, down from US$1.0375 immediately beforehand, before ticking back up to US$1.0302 at 0750 GMT. Australia's benchmark stock index extended gains to finish up 1%.
The RBA joins central banks in other parts of the developed world, including the U.S. and Europe, in acting to support its economy with added stimulus. The bank already has cut interest rates by 1.50 percentage points since November 2011 as its anxiety over the state of the domestic and global economy has deepened.
Of particular concern has been weakening growth in China, Australia's biggest trading partner.
The soaring Australian dollar also was central to the RBA's decision to cut. While prices for key raw material exports such as coal and iron ore have slumped in recent months, the currency has remained elevated--making life tougher for manufacturers and other exporters whose products have become globally less competitive.
"The exchange rate has remained higher than might have been expected given the observed decline in export prices and weaker global outlook," Mr. Stevens said in Tuesday's statement.
Mr. Stevens said Australia's national income had been hit by the recent falls in commodity prices, a factor that appears to have weighed heavily in the RBA's thinking.
"The terms of trade have declined by over 10 per cent since the peak last year and will probably decline further, though they are likely to remain historically high," Mr. Stevens said.
On Tuesday, the RBA separately said its index of commodity prices had fallen by 18.5% in Australian dollar terms in the year to September. The government's chief commodities forecaster last month cut its forecast for revenue from energy and minerals exports in the current fiscal year by 20 billion Australian dollars.
The price of iron ore, which accounts for about 20% of Australia's exports, is 30% below its 2012 peak in April, and down about 46% from its record high in February 2011. Coal, which accounts for around 10% of exports, is languishing around 3-year lows.
BHP Billiton Ltd. (BHP) and Rio Tinto Plc (RIO) are among Australian companies that have deferred billions of dollars of new investment and closed mines as they strive to rein in costs.
The rate cut came even as the most recent inflation data showed price pressures were being adequately contained. The core inflation rate in the second quarter of 2012 was just 2%, the very bottom of the RBA's 2%-3% inflation target band.
Brian Redican, an economist at Macquarie Bank, said the RBA would probably cut again in November to make sure it stays ahead of problems in the world economy and to address any further weakening in commodity prices.
Economists will be keen to monitor the Australian dollar's reaction over the next few weeks for signs it's responding to the cut.
The local dollar has remained firm throughout 2012, supported in part by strong foreign demand for Australia's AAA-rated bonds. Central banks have lined up to buy such bonds as they seek a relatively safe high-yielding haven amid global uncertainty.