Australia’s central bank slashed interest rates by 100 basis points (bps) to a six-year low yesterday in an aggressive move against threats to growth posed by the global financial crisis.
The bigger-than-expected cut by the Reserve Bank of Australia (RBA) dropped the official cash rate to 4.25 percent, its lowest level since May 2002.
It was the fourth consecutive monthly cut by the RBA, which has sliced a total of 300bps off the official rate since September, as inflation fears give way to concern about the impact of slower world economic growth.
Most financial market economists had expected a 75bps reduction, although with the bank having opted for a big one percentage point cut in October a repeat was not totally unexpected.
The cut failed to boost the Australian stock market in the face of a major fall on Wall Street overnight, and share prices closed down 4.2 percent with major miners and financials leading the slide.
“Recent actions by governments and central banks to stabilize their respective financial systems have begun to take effect,” RBA Governor Glenn Stevens said in a statement. “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.”
The Australian economy had been more resilient than others, but recent data indicated that a significant moderation in demand and activity had occurred, he said, and it was likely inflation would soon start to fall.
Statistics released by the TD Securities-Melbourne Institute on Monday showed annual inflation fell from 3.9 percent in October to 3.0 percent last month — just at the top end of central bank’s 2.0 percent to 3.0 percent target.
“The previous inflation problem has been turned on its head,” TD Securities senior strategist Joshua Williamson said. “There has been a quite staggering turnaround in price pressures in recent months.”
The RBA noted, however, that there had been a major easing in monetary policy over the past few months along with a fiscal stimulus package by the government worth A$10.4 billion (US$6.76 billion).
“Together with the spending measures announced by the government, and a large fall in the Australian dollar exchange rate, significant policy stimulus will be supporting demand over the year ahead,” Stevens said.
Economists said the tone of the statement suggested the RBA could proceed with more caution next year, slowly lowering the cash rate to multi-decade lows under 4 percent.