Australia’s central bank slashed its official interest rate by a larger-than-expected 75 basis points yesterday, cutting it to 5.25 percent amid concerns that a slowdown in China will hurt exports.
The Reserve Bank of Australia (RBA), which has now cut rates by 2 percent since September, said the aggressive reduction in the cash rate was warranted given the current global and domestic financial climate.
With Australian economic forecasts gloomy and some western economies headed into a recession, it said that world financial markets remained turbulent and share markets volatile while the Australia dollar had also tumbled.
RBA Governor Glenn Stevens also highlighted concerns about a slowdown in China and the knock-on effect this could have for export commodity prices and therefore the Australian economy.
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, he said.
These conditions have contributed to further falls in world commodity prices.
Market forecasts had been for the RBA to deliver a cut of 50 basis points following a sharp and unexpected one percent reduction last month designed to counter the effects of the global financial crisis.
Economists said the bank would likely cut interest rates again before the end of the year, as it sheds the tightening stance designed to curb inflation which saw rates hit a 12-year high of 7.25 percent in March.
It seems like they’re panicking with what’s happening in global growth and its implications for the Australian economy, Tom Kenny, economist at Nomura, told Dow Jones Newswires.
Stephen Halmarick, chief economist at Citigroup, forecast the official cash rate could drop to 4 percent by early next year.
The focus of this statement is on deteriorating international conditions and falling commodity prices — that’s really what’s got them moving aggressively, he said.
The Australian stock market rallied on the cut.
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