Australia cuts rates to six-year low

Sydney: Australia's central bank slashed interest rates to a 6-and-half-year low, bringing the easing since September to three percentage points and leaving the door open to more cuts as it fights to save its economy from recession.

The Reserve Bank of Australia (RBA) cut its cash rate by an unexpectedly bold 100 basis points to 4.25 per cent - the lowest since May 2002 - after its monthly policy meeting. It was the bank's fourth rate cut in as many months.

"It's taken the cash rate back to a historical low but it won't be the last one," said John Edwards, chief economist at HSBC. "I expect the cash rate to be under 4 per cent by March."

Explaining the move, Governor Glenn Stevens noted the perilous state of the global economy and suggested there could be more cuts.

The futures market is already well ahead of him, pricing in swingeing cuts to near 3.0 per cent next year, depths that have not been seen in money markets since the early 1960s.

Neither is the central bank alone in its urgency. The European Central Bank, Bank of England and Reserve Bank of New Zealand are all expected to chop rates this week in an effort to revive growth.

RBA's Stevens said a big slowdown in domestic demand was underway which would soon pull inflation lower and warranted moving policy to an expansionary setting.

Figures on gross domestic product due today are expected to show the economy grew a paltry 0.2 per cent in the third quarter, and perhaps even suffered an outright contraction. Annual growth is seen braking to 1.9 per cent, down from more than 4 per cent this time last year.

"The economy is poised on a knife edge and the RBA is going to keep cutting until it starts to get traction with consumers and housing," said Macquarie senior economist Brian Redican.

The central bank's task was aided by most of the main commercial banks which hurried to cut their variable mortgage rates - which are the most commonly used in Australia - by the full 100 basis points yesterday.

That should deliver a big and almost immediate boost to household income, and contrasts with the United States where the Federal Reserve has had trouble bringing down mortgage rates. All of this was welcomed by Australia's government, which is keen to avoid a politically damaging recession.

"This is a vital rate cut from the Reserve Bank, delivered at a time when all our joint efforts are directed to strengthening the economy," said Treasurer Wayne Swan. The government has weighed in with a A$10.4 billion (Dh24.60 billion) stimulus package, much of which hits wallets next week, and is spending more on roads, hospitals and schools.

There have been hints all this stimulus might be helping consumer confidence. Retail sales showed a surprise 0.7 per cent increase in October, when analysts had looked for a 0.4 per cent drop.

Furniture and electricals retailer Harvey Norman yesterday said like-for-like sales for the 28 days to November 30 rose 0.5 per cent compared to the same period last year, thanks in part to discounting.

Grocery wholesaler Metcash also reported it had satisfactory sales in November and saw no weakening in its markets, though it is in a traditionally defensive sector. But such resilience could prove all-too fleeting in the face of fresh falls in equity markets and deepening global gloom.