8 Oct 2008

Australian central bank slashes interest rate

6:16 am on 8 October 2008

The Reserve Bank of Australia has surprised financial markets by slashing interest rates by 1% because of the severe international financial conditions.

The official cash rate is now 6% and takes effect on Wednesday.

The ABC reports most economists had been predicted a cut in the official cash rate of 0.5%, or 50 basis points.

The cut, announced on Tuesday, is the first official one-percentage point move since 1994, when rates increased by 1%. The last time rates were cut by this amount was in May 1992.

In its accompanying statement, the Reserve Bank said conditions in international financial markets took a significant turn for the worse in September, and there is evidence of slowing economic growth in Australia's trading partners in Asia.

It said there is now the risk that Australian economic demand and output could be significantly weaker than it had earlier expected.

It noted banks were facing higher costs and said the unusually large movement in the cash rate was needed in order to bring about a significant reduction in the interest rates they charge.

Governor Glenn Stevens said the RBA had judged that a large movement in the cash rate was needed, after studying the outlook for global growth and its likely effect on Australia, and funding costs in wholesale credit markets.

"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," he said.

"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."

The pressure is now on the big banks to pass on at least some of the rate cut.

Political comment

Prime Minister Kevin Rudd welcomed the decision, saying it would

help maintain the stability of the financial system and see Australia through "tough times ahead".

Treasurer Wayne Swan said the action would help the Australian economy.