Reserve Bank says big move necessary amid global crisis
HONG KONG (MarketWatch) -- The Reserve Bank of Australia cut its benchmark policy interest rate by a percentage point to 6.0% from 7.0%, citing disarray in global financial markets and mounting evidence of a sudden deceleration in economic growth among Australia's major trading partners in Asia.
"The Board judged that a material change to the balance of risks surrounding the outlook had occurred, requiring a significantly less restrictive stance of monetary policy," Reserve Bank Governor Glenn Stevens said in a statement Tuesday accompanying the rate decision.
Stevens said conditions in international financial markets had taken a significant turn for the worse in September, adding that obtaining financing is likely to be difficult around the world for some time to come in spite of efforts by central banks to unfreeze credit markets through liquidity injections.
"Economic activity in the major countries is also weakening, and evidence is accumulating of a significant moderation in growth in Australia's trading partners in Asia," Stevens said.
The governor also said consumer price inflation will likely accelerate to 5% on year in September but could begin easing in 2009.
"The recent deterioration in prospects for global growth, together with much more difficult market conditions even for creditworthy borrowers, now present the risk that demand and output could be significantly weaker than earlier expected. Should that occur, inflation would most likely fall faster than earlier forecast," Stevens said.
Surprisingly loose
The move exceeded most analysts' expectations for a half-point cut.
"There are two sides to it. A 100 basis points says they are prepared to step up and provide the confidence booster the markets need. The other side says a 100 basis points is much more than the market expected, and what is it that the RBA sees that no one else is seeing?" said Patrick Bennett, Asia foreign exchange and rates strategist for Societe Generale in Hong Kong.
The central bank had been under pressure to cut lending rates amid turmoil on global financial markets, weakening consumer spending and slowing growth in home borrowing.
Australia's automotive industry last week called for an urgent interest rate cut after car and truck sales fell 3.1% in September from a year earlier.
The Reserve Bank reduced its benchmark lending from a 12-year high last month, signaling the beginning of a rate-easing cycle after 12 successive quarter-point hikes.
Strategist said the RBA's move Tuesday could herald the start of additional rate cuts from other central banks, as part of a coordinated move to combat the global credit crunch.
"An important indicator this morning will be the RBA action. A 50 basis point or even larger rate cut might indeed usher in global central bank easing," Uwe Parpart, Hong Kong-based chief economist with Cantor Fitzgerald, said prior to the decision.
Chris Oliver is MarketWatch's Asia bureau chief, based in Hong Kong.
MarketWatch
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