Australia Cuts Rates by One Point

Australia’s central bank cut its benchmark interest-rate by one percentage point, extending the biggest round of reductions since a recession in 1991.

Governor Glenn Stevens lowered the overnight cash rate target to a six-year low of 4.25 percent in Melbourne today, the fourth reduction in as many months. Four of 21 economists surveyed by Bloomberg News forecast today’s move, and 15 tipped a three-quarter point cut.

Stevens, who says Australia’s biggest mistake would be to talk itself into a recession, aims to restore consumer and business confidence battered by this year’s 44 percent slump in the benchmark S&P/ASX 200 Index of stocks and the biggest drop in house prices since 1978. The bank said last month it has scope to support growth as inflation slows.

Gross domestic product growth probably slowed in the three months through September to 0.2 percent from the second quarter, when it expanded 0.3 percent, economists forecast. That would cut annual growth to 1.9 percent, the smallest gain since the second quarter of 2002. The GDP report will be released tomorrow at 11:30 a.m. in Sydney.

Stevens and his board cut the benchmark rate by a quarter percentage point in September, followed by a one percentage point reduction in October and a three-quarter point adjustment last month. Today’s meeting is the last scheduled gathering of policy makers until Feb. 3.

Australia’s central bank forecast last month that non-farm gross domestic product growth will slow to 1 percent in the 12 months through June from 2.5 percent a year earlier.

Unlike the U.S., Japan, Europe and the U.K., Australia’s economy has so far avoided a recession, boosted by a mining boom that has kept unemployment close to the lowest level in more than three decades. The jobless rate was 4.3 percent in October.

To buttress the economy, Prime Minister Kevin Rudd said last week that he may allow the government’s budget to slip into deficit for the first time since 2002.

The government agreed with state leaders on Nov. 29 to spend A$15.1 billion ($9.8 billion), mainly on health and education, to generate 133,000 jobs. Rudd is also giving A$10.4 billion in cash grants to the elderly, first-home buyers and families.

Policy makers aim to strike a balance between bringing inflation, which surged to 5 percent in the third quarter, back within the bank’s target range of between 2 percent and 3 percent, while avoiding an unnecessary weakening in demand,” Stevens said last month.

The Reserve Bank expects the inflation rate will fall back within the target range in 2010. A TD Securities Ltd. index, published yesterday, showed consumer prices gained 3 percent in the 12 months through November, the smallest increase in more than a year.

Retail sales rose 0.2 percent in October, a report showed earlier today. David Jones Ltd., Australia’s second-biggest department store chain, said last week that sales in the three months ended Oct. 25 fell 6.3 percent.

Recent reports show the economy is slowing as consumers and businesses trim spending. Company investment growth cooled in the third quarter, business confidence plunged in October to a record low and consumers were pessimistic in November for a 10th straight month. House prices fell 1.8 percent in the third quarter, the most in 30 years.

A one percentage point cut in mortgage rates reduces repayments on an average A$250,000 home loan by almost A$180 a month.

Australia Cuts Rates by One Point,
12/1/2008 7:41:37 PM