Australia’s Central Bank Cuts Rate to 49-Year-Low 3%

Australia’s Central Bank Cuts Rate to 49-Year-Low 3%

April 7 (Bloomberg) -- Australia’s central bank cut its benchmark interest rate to a 49-year low after policy makers signaled the economy faces its first recession since 1991.

Glenn Stevens lowered the overnight cash rate target by a quarter-point to 3 percent in Brisbane today, as forecast by four of 23 economists surveyed by Bloomberg News. Five expected a half-point reduction and 14 tipped no change.

Australia’s economy will contract this year for the first time in more than two decades as a deepening global recession saps demand for exports of natural resources, Deputy Governor Ric Battellino said last week, revising a previous forecast for 0.5 percent growth. Rio Tinto Group today said it will fire 100 workers at its Weipa mine in Queensland, adding to a surge in job cuts that is driving up unemployment.

“The rising unemployment rate provides a clear justification for even lower interest rates,” said Richard Gibbs, chief economist at Macquarie Group Ltd. in Sydney.

The Australian dollar rose to 71.14 U.S. cents at 2:36 p.m. in Sydney from 70.80 cents just before the decision was announced. The two-year government bond yield gained 4 basis points to 2.95 percent. A basis point is 0.01 percentage point.

Stevens said today that policy makers meeting in Brisbane “judged that there was scope for a further modest adjustment to the cash rate.”

“The stance of monetary policy, together with the substantial fiscal initiatives, will provide significant support to domestic demand over the period ahead,” he added.

Economy Shrinks

Since the central bank’s March meeting, when it kept rates unchanged, reports have shown the economy unexpectedly shrank 0.5 percent in the fourth quarter, the first contraction since 2000, and retail sales slumped 2 percent, the biggest drop in almost nine years.

Australian employers probably cut 25,000 jobs last month and the unemployment rate rose to 5.4 percent from 5.2 percent, the highest level in almost four years, according to the median estimate in a Bloomberg survey of economists. The jobs report will be released April 9.

Advertisements for job vacancies in newspapers and on the Internet tumbled 8.5 percent in March from February, and a record 44.6 percent from a year earlier, according to a report published yesterday by Australia & New Zealand Banking Group Ltd.

Slumping global demand for exports from the world’s biggest shipper of coal and iron ore means “there are limits on how much we can insulate ourselves from what is happening abroad,” Battellino said in Brisbane March 31.

Global Outlook

“Therefore, there are probably still some difficult times ahead,” he added. Gross domestic product is “likely to fall in 2009.”

The Organization for Economic Cooperation and Development has forecast the steepest economic contraction in more than 50 years across its member nations. The combined economy of the world’s most-industrialized countries will shrink 4.3 percent in 2009, it said March 31.

To spur domestic demand and avoid a slump in the housing market, the central bank began the first of five consecutive interest-rate cuts in September, lowering the benchmark rate from 7.25 percent to 3.25 percent by February.

The bank’s decision today cuts the benchmark rate to the lowest level since March 1960, according to historical figures provided by the Reserve Bank.

Households with an average-sized mortgage of A$250,000 ($177,000) are paying A$7,000 a year less than they were six months ago, which is equal to 8 percent of average family incomes, according to Reserve Bank calculations.

Today’s reduction will reduce repayments for those households by another A$480 a year.

Government Handouts

Home-loan approvals probably rose in February for a fifth month, gaining 2 percent, according to the median estimate of 20 economists surveyed by Bloomberg News. The figures will be published tomorrow in Sydney.

Australia’s government also said in February it will spend A$42 billion on cash handouts to families and on infrastructure. Today it announced plans to join with private partners to spend A$43 billion over the next eight years on a high-speed Internet network connecting 90 percent of the nation’s homes.

Australia is “one of the better-performing economies in the developed world” and is well placed to benefit from a global recovery, Deputy Governor Battellino said last week.

Recent reports showed home-building approvals rose in February for the first time in eight months and the trade surplus unexpectedly widened to the second-largest amount on record as exports of gold surged.

‘Historically Low’

“The evidence suggests, very tentatively, that we may have passed a trough,” Adam Carr, a senior economist at ICAP Australia Ltd. in Sydney, said ahead of today’s decision.

“The cash rate was already historically low and market sentiment has improved,” since the bank’s March meeting, Carr said, referring to a 7.1 percent increase in Australia’s benchmark S&P/ASX 200 stock index in March, the first monthly gain since August.

Australia has scope to cut borrowing costs further in coming months if the economy continues to weaken.

By contrast, the U.S. Federal Reserve’s benchmark rate is close to zero, the Bank of England’s is the lowest since its creation in 1694 and the European Central Bank trimmed its main rate by a quarter point to 1.25 percent on April 2. Japan today kept its rate at 0.1 percent.

BLOOMBERG