Big Interest Rate Cut for Australians

In a move that will be welcomed by the country’s homeowners, Australia’s Central Bank has decided to cut its official cash rate dramatically, from 7 percent to 6 percent. The last time the bank took such bold action was over sixteen years ago.

Explaining the cut, a spokesman said that conditions in international financial markets had recently taken a significant turn for the worse and financial failures in several major economies have been accompanied by heightened instability in the markets.

The world-wide credit crunch means borrowing money is likely to be difficult for some time to come. This is also affecting Australia, although to a lesser degree than in many other countries, because of the comparative strength of Australia’s banking system.

Economic activity in major economies is also weakening, and it looks as if growth may be slowing in Asia, where the bulk of Australia’s high earning commodity exports go. Also, commodity export prices have pulled back from their highs. This, combined with below-trend growth in the global economy, suggests that global inflation will ease in 2009.

Australia’s next inflation figure, at around 5 per cent, is likely to be well above the Bank’s target but the Bank believes inflation will start to decline in 2009.

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.

It does not look likely that Australia’s retail banks will pass on the full one percent cut to their customers. Westpac said it would lower its variable home loan rate by 0.8 percent rather than the full one percent.