Australia slashes interest rate to avert recession
Rohan SullivanAustralia's central bank slashed its key interest rate by one percentage point Tuesday in the latest bold move by the country's top finance officials to stave off a recession.
The reduction is the fourth in three months by the Reserve Bank of Australia and takes the cash rate to 4.25 percent — its lowest level since May, 2002.
Analysts, most of whom had expected a 0.75 percentage point cut, said Tuesday's decision shows the bank is taking an aggressive approach in tackling the domestic fallout of a global economic downturn.
The global turmoil has taken Australia from boom times to the verge of recession in a matter of months, and policymakers are throwing billions of dollars at the economy to try to stop it from tipping over the edge.
The cash rate has fallen 3 percentage points since September as the central bank tries to divert cash being paid into mortgages into retail spending that will keep the economy ticking over.
In the same vein, Prime Minister Kevin Rudd has raided the budget surplus to pump more than Australian dollars 10.4 billion ($6.7 billion) into the economy.
Reserve Bank Gov. Glenn Stevens said efforts by government and central banks to stabilize the recent turmoil in financial markets have begun to take effect.
"Nonetheless, financial market sentiment remains fragile, as evidence accumulates of weak economic conditions in the major countries and a significant slowing in many emerging countries," Stevens said in a statement explaining the reasons for the rate cut.
He said Australia's economy — which had been riding a resources boom and has little exposure to subprime mortgages that triggered the trouble in the United states — "has been more resilient than other advanced economies."
"But recent data nonetheless indicates that a significant moderation in demand and activity has been occurring," he said.
Rudd reinforced the concerns shortly before the bank's decision was announced.
"This will be a tough year ahead," Rudd told Parliament. "The global financial crisis will affect Australia — growth and jobs."
Retail banks quickly responded to the central bank's decision, announcing cuts of 1 percentage points or 0.8 percentage points.
Treasurer Wayne Swan said the rate cut was "vital ... at a time when all our joint efforts are directed toward strengthening the economy and protecting Australian jobs."
The latest cut wipes out a series of hikes by the Reserve Bank since 2002, when a commodity boom driven by China's voracious appetite for Australia's mineral resources began taking off and lifted inflation with it.
"They have undone six years in little over three months," said RBC Capital Markets senior economist Su-Lin Ong.
Analysts said further cuts were likely next year. Another cut would take the cash rate below 4.25 percent for the first time since the 1960s.
Earlier Tuesday, Finance Minister Lindsay Tanner said recent measures to save the economy from recession would work.
"We don't believe we'll head into recession," Tanner told Australian Broadcasting Corp. radio.
Some analysts were less optimistic.
Shane Oliver of AMP Capital said the government's stimulus package, recent rate cuts, lower petrol prices and a fall in the value of the Australian dollar were all "great news" for the economy.
"But I don't think they are enough to stop a likely slide into recession, or if not then a very severe slump over the course of the next six to 12 months," Oliver told Sky Business television.
Tanner played down the significance of the U.S. National Bureau of Economic Research report Monday that the U.S. economy has been in a recession since December 2007.
Australia has enjoyed more than 17 years of continuous economic growth, but most signs now point to a slowdown.
An index of economic trends reported last week that the outlook for the Australian economy is at its weakest in 20 years.