By Mike Caggeso
Australia’s central bank took the hatchet to its benchmark interest rate today (Tuesday), cutting 75 basis points to 5.25%, the lowest since March 2005.
Since the start of September, the Reserve Bank of Australia cut interest rates three times for a total of 200 basis points, in an attempt to insulate the economy from the global financial crisis.
The bank cited a variety of reasons for the cut, including turbulent financial markets, falling commodity prices, slowing economic growth China, and the recent rash of rate cuts issued by other central banks around the world.
Specifically, Australia joins the United States, China, India, Japan and South Korea, all of which lowered borrowing costs in the past week. The European Union and United Kingdom are expected to follow suit this week.
“International economic data have continued to point to significant weakness in the major industrial economies, and there have been further signs that China and other parts of the developing world are slowing as well,” Reserve Bank Governor Glenn Stevens. “These conditions have contributed to further falls in world commodity prices.”
Also in the bank’s release, Stevens said the rate cut could hamper the central bank’s goal of reigning inflation to 2% to 3%. CPI inflation in year‑ended terms picked up to 5%, while underlying measures were just over 4.5%.
But Stevens said he expects inflation to cool by the end of the year.
“Global disinflationary forces will assist in this regard, though the depreciation of the exchange rate means that the decline of the inflation rate to the target could take longer than would otherwise be the case,” he said
Last month, Australia’s All Ordinaries stock index plummeted 14%. And that’s on top of falling home prices and retail sales.
The Reserve Bank hasn’t been this aggressive in cutting rates since Australia’s last recession in 1991, Bloomberg reports.
And more cuts could still be in store.
“We think the cash rate will bottom at 4% by early next year,” Stephen Halmarick, co-head market economics at Citigroup Inc. (C), told Reuters. “They are obviously very concerned about the outlook for global growth, I think that is warranted.”
The caution is warranted given the carnage around the world, but Australia’s economy could be one of the few to emerge relatively unscathed.
Housing prices haven’t fallen nearly as bad as those in the United States. Australia’s government budget is in surplus – a likely effect of soaring commodity prices earlier this year.
And by Christmas, $8.7 billion of a $10.4 billion stimulus package will arrive in mailboxes around the country – which may be the life preserver the economy needs to keep GDP from sinking into the red.
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