Australia’s central bank cut its official interest rate by a bigger-than-expected 1 percentage point yesterday to ease credit concerns amid global financial turmoil, cheering investors around the region.
The cut to 6 percent was the largest by the Reserve Bank of Australia (RBA) since May 1992. Analysts had expected the RBA to drop the rate by half a percentage point.
Australian stocks climbed into positive territory after opening sharply lower. Other Asian markets gained after the move as well.
RBA Governor Glenn Stevens said in a statement that the central bank had judged that a large cut in the cash rate was needed after studying the outlook for global growth and its likely effect on Australia.
“Conditions in international financial markets took a significant turn for the worse in September,” Stevens said. “Large-scale financial failures in several major countries were accompanied by serious dislocation in interbank markets and heightened instability in other markets, including sharp falls in share prices.”
He also referred to evidence of “a significant moderation in growth in Australia’s trading partners in Asia.”
Stevens said financing around the world would be difficult for “some time” and said that Australia was affected less than other countries “given the relative strength of the local banking system.”
The move follows a quarter-point reduction last month that was the first decrease in nearly seven years.
Investors responded to the move immediately, lifting Australia’s benchmark S&P/ASX-200 index nearly 2 percent to 4,628.9 in the hour after the announcement.
Australian Prime Minister Kevin Rudd said the decision would help maintain the stability of the financial system and see Australia through “tough times ahead.”
It was not immediately clear whether banks would pass on the rate cut to their customers.
Saul Eslake, chief economist with ANZ Banking Group Ltd, welcomed the cut as “extraordinary and bold.”
“They are clearly very concerned about the financial crisis and its potential impact on global growth, on Asian economies which they specifically mention and on commodity prices,” Eslake said. “I think it will be seen firstly as contributing to the health of the financial system and a big step to reducing the downside risks to economic growth, provided it isn’t interpreted as panic.”
The cut came even though inflation is at 4.5 percent, well above the RBA’s target range of between 2 percent and 3 percent.
Separately, Indonesia’s central bank raised its benchmark interest rate 25 basis points to 9.50 percent yesterday, signaling its commitment to fight inflation at the risk of slower growth, officials said.
The move would also bolster the rupiah, which fell to 9,740 against the dollar in early trade yesterday, its lowest level since January 2006, before recouping some losses to 9,640 on suspected bank intervention.
Bank Indonesia Governor Boediono told Dow Jones Newswires he remained “alert but not worried” over the rupiah’s weakness.
Inflation soared to 12.14 percent year-on-year last month from 11.85 percent in August, driven by resilient domestic demand and higher global commodity and fuel prices.
Meanwhile, Japan’s central bank left its key interest rate unchanged yesterday amid heightened anxiety that the US credit crisis was quickly spreading from Wall Street to Europe and beyond.