Australia cuts interest rates to seven year low; “The economy is on a knife-edge”

Australia’s interest rate was cut by a surprise 100 basis points today, taking the cash rate to the lowest it has been in seven years

The fourth cut in as many months, a full 25 basis points larger than economists predicted, is seen as further proof that Australia will struggle to avoid recession over the next 12 months.

“The economy is on a knife-edge,” said Macquarie economist Brian Redican.

The Reserve Bank cited the state of the global economy and a big downturn in domestic demand for the cut to 4.25%, with Glenn Stevens, the governor of the RBA, saying that ti was time to take monetary policy to an expansionist setting.

Analysts warned that the interest rate cut would not stop the economy from slowing further in line with the downturn in the US and China and predicted further rate cuts in 2009.

“This will help, but the headwinds coming off-shore are so large that the Australian economy will slow aggressivley next year,” Stephen Halmarck, a senior analyst for Citgroup told The Times. “Data out of the US and especially China has surprised everyone.

“We think the rates will fall again in Feburary by 75 points to 3.5%,” he said.

The RBA has cut rates by 300 basis points since September. The latest cut came as markets across the US, Europe and Asia tumbled at the news that the US economy had been in recession for 12 months.

Two of Australia’s largest banks, National Australia Bank and Commonwealth Bank immediately said they would pass on the full rate to customers and other banks are expected to follow suit.

The Australian government, whose recent stimulus package aimed at shoring up household confidence is due to hit wallets this week, welcomed the latest cuts.

“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.

There is a suggestion that consumer confidence has been boosted by the Government’s A$10.4 billion (£4.5 billion) boost, and by the widely expected interest rate cut.

Retail sales showed a surprise 0.7 percent increase in October, when analysts had looked for a 0.4 percent drop.

However GDP figures due tomorrow on Wednesday are expected to show the economy grew 0.2 percent in the third quarter, and perhaps even suffered an outright contraction. Economists believe annual growth may slow as far as .5 percent next year, down from more than 4 percent this time last year.

Anne Barrowclough in Sydney
December 2, 2008

Source: Times Online

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