RBA cuts official interest rates by a full percentage point

The West Australian article here.



Market stunned by massive rate cut

7th October 2008, 11:30 WST

The Reserve Bank has cut official interest rates by a full percentage point, stunning economists and financial markets.

In its first full percentage point cut in rates since May 1992, bank governor Glenn Stevens said conditions in international financial markets had taken a “significant turn for the worse” through September.

The move takes rates to six per cent, the lowest since November 2006.

Mr Stevens said the slowdown in the global economy meant the inflation risk was abating.

The bank had to make monetary policy much easier in such conditions.

“The recent deterioration in prospects for global growth, together with much more difficult market conditions even for creditworthy borrowers, now present the risk that demand and output could be significantly weaker than earlier expected. Should that occur, inflation would most likely fall faster than earlier forecast,” he said.

“Given that background, the Board judged that a material change to the balance of risks surrounding the outlook had occurred, requiring a significantly less restrictive stance of monetary policy.”

In an admission of the concerns that banks may not be able to pass on all cuts in rates, Mr Stevens said the board realised the tougher conditions facing commercial banks.

“The board also took careful note of movements in funding costs in wholesale markets. Having weighed these considerations, the board decided that, on this occasion, an unusually large movement in the cash rate was appropriate in order to bring about a significant reduction in costs to borrowers,” he said.

The unexpected move - markets had expected a half percentage cut - generated a huge spike on the Australian stock market which had been in negative territory before the announcement.

Macquarie Bank interest rate specialist Rory Robertson said the Reserve would aggressively cut interest rates in coming months to avoid sending Australia into recession.

“RBA policymakers now will do what they can to avoid excessive rises in unemployment,” he said.

“That means managing key lending rates lower, with some urgency. And not worrying too much about the recent weakness of the Australian dollar, which may or may not be sustained; if it is, recession will be easier to avoid.”

SHANE WRIGHT
ECONOMICS EDITOR



Post Date: 8 Oct 08