Australia trade deficit widest since early 2008

Australia's trade deficit yawned out to its widest in four-and-a-half years in October as imports rebounded while exports stayed flat, highlighting the pain a declining terms of trade is inflicting on the resource-rich nation.

Thursday's figures from the Australian Bureau of Statistics showed the deficit on goods and services grew to A$2.1 billion ($2.2 billion) in October, from A$1.4 billion the month before.

That was the 11th straight month of deficits and the largest shortfall since March 2008, another reminder of the hole that lower prices for key exports such as iron ore and coal have knocked in national income.

"At present the slowdown in the Chinese economy is depressing commodity prices and while volumes of coal and iron ore exports remain strong it is unlikely that trade surpluses will be back on the agenda till mid next year," said Savanth Sebastian, an economist at CommSec.

"Looking forward, the lower terms of trade will ensure the Reserve Bank can afford to boost household activity and as such further rate cuts cannot be ruled out."

The need to offset the drag from trade is a major reason the Reserve Bank of Australia (RBA) cut interest rates a quarter point this week to 3 percent, matching the record lows set during the global financial crisis.

Indeed, investors suspect rates will have to fall further yet given the strength of the local currency and the Labor government's commitment to budget belt tightening.

Interbank futures <0#YIB:> imply rates around 2.5 per cent by mid-year while swap rates show a 54 percent probability of an easing at the RBA's next policy meeting in February.

Australia's exports of goods and services edged up a bare 0.4 per cent in October at A$24.4 billion, with a drop in coal earnings offsetting a bounce in iron ore and farm exports.

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