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RBA cuts benchmark int. rate to 45-year low 3.25%

Australian central bank cuts benchmark to 45-year low 3.25%

Feb. 3 – The Reserve Bank of Australia cut its benchmark interest rate to a 45-year low, saying the reduction, combined with the government’s A$42 billion fiscal stimulus package, will buffer the economy from the global slump.

The overnight cash rate was reduced by 100 basis points to 3.25%, as predicted by most economists.

Australia’s financial system has remained strong and has felt less impact from the deterioration in world economic conditions than other advanced economies, Governor Glenn Stevens said in a statement on the RBA’s website.

Still, “the combination of last year’s financial turmoil, a severe global downturn and substantial falls in commodity prices has had a significant dampening effect on confidence, and therefore on prospects for growth in demand,” he said.

The announcement came hours after Australian Treasurer Wayne Swan unveiled a fiscal stimulus package that he said would create 90,000 jobs, build homes, make family benefit payments and grant tax breaks. The scale of the four-year spending plan will plunge the federal government into a A$22.5 billion budget deficit.

Swan said the package will lift gross domestic product by an estimated 0.5% in fiscal 2009 and by 1% in 2010. Without the package, the economy was expected to contract this year, based on Treasury estimates.

“The combination of expansionary monetary and fiscal policies now in place will help to cushion the Australian economy from the contractionary forces coming from abroad,” Stevens said.

Australia’s central bank joins its counterparts in the U.S., Europe and Asia is lowering interest rates as the world’s biggest economic powers, the U.S., Japan and Europe slide into simultaneous recession for the first time since WWII. The downturn is curbing demand for Australia’s commodities and forcing companies such as BHP Billiton and Rio Tinto to reduce output. More rate cuts may be in the offing from the RBA, economists said today.

“Given the decision to make another large cut almost entirely due to the deteriorating world economic outlook, we think that there are more rate cuts to come,” said

Bill Evans, chief economist at Westpac Institutional Bank.

“We anticipate a 75bp cut following the March meeting, and a final 50bp cut in April,” Evans said. “That target will be dependent on global economic conditions over the next two months, but we see little reason to anticipate any evidence of stability over that period.”


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