Business | Banking
Australia slashes benchmark rate
Australia's central bank cut its benchmark cash rate by a bigger-than-expected 75 basis points on Tuesday, in an increasingly urgent effort to save the economy from the recession rapidly engulfing much of the developed world.
- Reuters
- Published: 23:43 November 4, 2008
Sydney: Australia's central bank cut its benchmark cash rate by a bigger-than-expected 75 basis points on Tuesday, in an increasingly urgent effort to save the economy from the recession rapidly engulfing much of the developed world.
The Australian dollar slipped and stocks rose as rates were slashed to 5.25 per cent, the lowest since March 2005, while the total easing of two percentage points in just two months was the most aggressive since 1990-91.
Investors took the Reserve Bank of Australia's (RBA) surprising boldness as a sign that further cuts were coming and bill futures jumped to price in rates of four per cent by mid-2009.
"We think the cash rate will bottom at four per cent by early next year," said Stephen Halmarick, co-head market economics at Citi. "They are obviously very concerned about the outlook for global growth, I think that is warranted."
In a brief statement following its monthly policy meeting, the RBA said recent economic data pointed to a significant worsening in the global outlook, with China and emerging economies slowing as well.
Australia's easing follows cuts in the US, China, India and Japan last week and comes ahead of likely reductions in the UK and euro zone last Thursday.
"A growing number of indicators has fallen off a cliff in October," said Rory Robertson, interest rate strategist at Macquarie. "Indeed, each of the big developed economies now is either in a severe recession or well on the way."
"The RBA must be worried about the growing risk of recession here and is trying to nip it in the bud," he added. "We see central banks cutting aggressively, towards four per cent in Australia and two per cent in the UK and the euro zone."
The cut helped Australian shares pare early losses. The S&P/ASX 200 index fell 0.2 per cent on the day, but it closed near the intra-day high.
The Australian dollar fell and was trading at $0.6658 at 0656 GMT, down 2.3 per cent from a day earlier $0.6816.
Outlook
In his post-meeting statement, RBA Governor Glenn Stevens said the grimmer global outlook coupled with falling prices for Australia's commodity exports meant it was likely that spending and activity at home would be weaker than previously expected.
The latest cut was lauded by Treasurer Wayne Swan.
"This is the additional rate relief families and businesses need in the face of the global financial crisis," he said. "It will strengthen our economy at a vital time."
The market crisis has been a destroyer of household wealth this year as equities crumbled. Even once resilient house prices suffered a record 1.8 per cent drop in the third quarter.
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