Australia Cuts Rate to 49-Year-Low 3%


Australia’s central bank cut its benchmark interest rate to a 49-year low after policy makers signaled the economy faces its first recession since 1991.

Australia’s economy will contract this year for the first time in more than two decades as a deepening global recession saps demand for exports of natural resources, the central bank says. Stevens said borrowing costs are at a historical low and that there was only scope for a modest adjustment” today.

The bank’s record 4.25 percentage points of cuts since September, and A$42 billion ($30 billion) in government cash handouts and infrastructure spending announced in February, will provide significant support to domestic demand,” Stevens said.

Still, today’s rate cut may not provide the stimulus Stevens hopes for after two of Australia’s four major banks refused to pass it all on to borrowers.

National Australia Bank Ltd., the nation’s biggest lender by assets, said it will not pass on any of the reduction, citing higher funding costs.” Commonwealth Bank of Australia said it will pass on only 10 basis points, or 0.10 percentage point.

Households with an average-sized mortgage of A$250,000 are paying A$7,000 a year less than they were six months ago, which is equal to 8 percent of average family incomes, according to Reserve Bank calculations.

Today’s reduction would have reduced repayments for those households by another A$480 a year if passed on in full by lenders.

Since the central bank’s March meeting, when it kept rates unchanged, reports have shown the economy unexpectedly shrank 0.5 percent in the fourth quarter, the first contraction since 2000, and retail sales slumped 2 percent, the biggest drop in almost nine years.

Demand for labor is weakening,” Stevens added, as companies including Rio Tinto Group fire workers. The world’s second-largest iron ore producer today said it will fire 100 staff at its Weipa mine in Queensland, adding to a surge in job cuts that is driving up unemployment.


TradingEconomics.com, Bloomberg
4/7/2009 5:27:48 AM