Australia Signals Rate Reduction

Australia's central bank signaled it may cut borrowing costs for the first time in almost seven years as slowing economic growth cools inflation.

The Australian dollar fell to a three-month low after traders bet Stevens, 50, will cut rates as soon as next month as the economy slows, forcing companies including Qantas Airways Ltd. and Starbucks Corp. to fire workers. Retail sales, consumer confidence and house prices have all fallen since the Reserve Bank last raised the benchmark in March.

The Australian dollar dropped to 92.22 U.S. cents at 4:32 p.m. from 92.72 immediately before today's decision. The two- year government bond yield fell 22 basis points to 5.97 percent. A basis point is 0.01 percentage point. The currency has fallen almost 6 percent against the U.S. dollar since hitting a 25-year-high 98.49 U.S. cents on July 16.

Stevens could join other central bankers around the world who have cut borrowing costs to cushion their economies from slower growth. New Zealand cut its key rate last month for the first time in five years. Australia's benchmark is 5.25 percentage points higher than the Federal Reserve's rate.

Australia's benchmark S&P/ASX 200 Index pared losses as Commonwealth Bank of Australia Ltd., the nation's biggest mortgage lender, led a rally by banks after Stevens' announcement. The index was 1.4 percent lower at the 4:10 p.m. close in Sydney, recovering from a 2.6 percent slump, its weakest level in 2 1/2 years.

The Reserve Bank has raised the benchmark rate 12 times since its last cut in December 2001 to curb inflation that has accelerated to 4.5 percent. It aims to keep annual price gains between 2 percent and 3 percent on average.

Stevens said today the bank expects inflation will slow to below 3 percent during 2010.

Australia's $1 trillion economy, in its 17th year of growth, expanded at the slowest quarterly pace in almost two years in the three months through March.

Since the central bank's previous meeting on July 1, reports have shown consumer confidence slumped in July to the lowest level in 16 years, retail sales fell 1 percent in June, and lending to consumers and businesses rose at the slowest annual pace since 2002. House prices fell in the second quarter for the first time in almost three years.

Australia Signals Rate Reduction, Bloomberg
8/5/2008 6:20:11 AM