Australia slashes interest rate to avert recession


  • Business
  • Tuesday, 02 Dec 2008

SYDNEY, Australia (AP) - Australia's central bank slashed interest rates 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 a row by the Reserve Bank of Australia and takes the cash rate to 4.25 percent.

It was larger than predicted by analysts, most of whom had expected a 0.75 percentage point cut.

The global financial crisis has taken Australia's economy 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 central bank's cash rate has fallen 3 percentage points since September as the 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, and warned the global slowdown is biting hard at home.

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 on 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.

Treasurer Wayne Swan urged retail banks to pass on Tuesday's rate cut in full to customers - and they immediately responded with cuts of 1 percentage points or 0.8 percentage points.

"This is a vital rate cut from the Reserve Bank delivered at a time when all our joint efforts are directed toward strengthening the economy and protecting Australian jobs,'' Swan told Parliament.

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. We've got also very strong stimulus now in the pipeline,'' Tanner told Australian Broadcasting Corp. radio.

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.

"It's not exactly big news that the U.S. is in economic difficulties,'' he said.

"This is a central part of a spreading global downturn that is putting substantial negative pressure on Australia's economy.''

Australia has enjoyed more than 17 years of continuous economic growth fed by Chinese demand for minerals and energy, 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.

The annualized growth rate of the index, compiled by Westpac Banking Corp. and the Melbourne Institute, fell to 1.1 percent in September from 3.5 percent in August.

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