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Australia slashes interest rates

Catherine Deshayes

In a move designed to boost the ailing Australian economy, the Reserve Bank of Australia has announced that it is slashing interest rates from seven per cent to six per cent...

In order to keep the Australian economy from sliding into a global recession, the bank has made a total turnaround in monetary policy, introducing the first rate cut since December 2001.

The cut comes at a time when the Australian dollar has slumped below US68 cents for the first time since September 2003.

The currency has fallen more than 30 per cent since hitting a post-float high of US98.49c cents on July 16th 2008.

This year has seen Australian property prices falling perilously close to a property recession. Damage to the market is being caused primarily by rising interest rates and the fall of the stock market and economic turmoil that is sweeping the globe.

Now, the Government has responded to the concerns, and Australia's cash rate has been lowered by one per cent, following a reduction in September, when the bank lowered the official cash rate by just 0.25 of a percentage point to seven per cent, the first reduction in nearly seven years.

The massive one per cent cut will provide home buyers and businesses with immediate relief.

Mortgages will now be cheaper, and the bank has reduced their funding pressures to make it easier to produce loans.

Prior to the cut, the credit crunch had made it difficult for many banks across the world to raise funds on international debt markets, restricting their ability to lend to customers.

Reserve Bank Governor Glenn Stevens said, "The recent financial turmoil and the prospect that inflation will weaken significantly in 2009 warrants a significantly less restrictive stance of monetary policy."

"The recent deterioration in prospects for global growth, together with much more difficult market conditions even for credit-worthy borrowers, now present the risk that demand and output could be significantly weaker than earlier expected.

"The board had concluded an unusually large movement in the cash rate was appropriate in order to bring about a significant reduction in costs to borrowers," added Mr Stevens.

Other markets showed signs of improvement after the rate cut was announced in Australia. Wall Street's overnight futures market jumped, and main indexes in South Korea, Singapore and Taiwan all edged higher. 

It is thought that more central banks will follow the Australian Reserve Bank's lead in order to thaw credit markets and spur growth.

Picture by Kevin Connors