Australia Cuts Key Rate for First Time Since 2001

By Jacob Greber

Sept. 2 (Bloomberg) -- Australia's central bank cut its benchmark interest rate for the first time in seven years amid signs the nation's $1 trillion economy is slowing.

Governor Glenn Stevens and his board reduced the overnight cash rate target by a quarter point to 7 percent in Sydney today, as forecast by 22 of 23 economists surveyed by Bloomberg News.

The biggest slump in retail sales in six years, a slide in business confidence and concern about the global credit squeeze meant ``there was now scope for monetary policy to become less restrictive,'' Stevens said. A report tomorrow will show gross domestic product expanded by the least in two years in the second quarter, according to a survey of economists.

``This is a huge psychological step,'' said Hans Kunnen, head of investment market research in Sydney at Colonial First State Global Management, which holds about $128 billion of assets. ``It's taken a bit of the pressure-cooker atmosphere off the consumer and off business.''

Traders, who had been betting Stevens would cut rates again in October, pared those positions after economists said today's statement suggested the central bank won't aggressively reduce interest rates. The implied yield on the 30-day interbank futures contracts due in October rose 3 basis points to 6.84 percent.

``Stevens has stepped away from signaling outright that further rate cuts are on the way,'' said Katie Dean, a senior economist at Australia & New Zealand Banking Group Ltd. in Melbourne. ``The timing of the next cut will depend on economic reports.''

Bank Stocks

The Australian dollar, the worst performer among the 17 most-active currencies since June 30, rose immediately after today's decision to as high as 85.33 U.S. cents. It later fell to trade at 84.14 cents at 4:56 p.m. in Sydney.

Shares in Australia's four largest banks, which have fallen more than 25 percent this year, rose today on speculation lower rates will buoy lending. National Australia Bank Ltd., the No. 1 lender by assets, added 0.6 percent, Westpac Banking Corp. gained 1.5 percent, Commonwealth Bank of Australia rose 1 percent and ANZ Bank increased 1.9 percent.

All four said they will pass today's quarter-point cut to mortgage holders.

``Weighing up the available domestic and international information, the board judged that there was now scope for monetary policy to become less restrictive,'' Stevens said in a statement.

Mortgage Repayments

Policy makers will ``continue to assess prospects for demand and inflation over the period ahead, and set monetary policy as needed to bring inflation back to the 2 percent to 3 percent target over time.''

Prior to today's decision, the nation's major lenders added an average 105 basis points to mortgage rates in 2008 as the global credit squeeze drove up funding costs. The central bank raised its benchmark by a total of 50 basis points in that time.

Today's cut will reduce repayments on an average A$250,000 ($211,000) home loan by A$42 a month, according to the Real Estate Institute. A report yesterday showed households spent 39.8 percent of their incomes on mortgage payments in the June quarter, the most in the 22 years the institute has measured affordability.

The reduction is welcome and will provide ``some modest relief'' to borrowers, Prime Minister Kevin Rudd told parliament after the decision. Still, ``interest rates took a long time to rise and they will take a long time to come back down,'' he said.

`Tough Times Ahead'

``There will be more tough times ahead as we continue to experience economic turbulence abroad and high inflation and interest rates at home.''

Policy makers raised borrowing costs 12 times between May 2002 and March this year, adding 300 basis points to the benchmark rate as it fought to curb consumer prices that jumped 4.5 percent in the second quarter of this year. The bank last cut the benchmark in December 2001, when it was 4.25 percent.

Since the bank's last meeting on Aug. 5, reports have shown new home sales fell to a two-year low and lending to consumers and businesses rose at the slowest annual pace since 2002. Companies including Qantas Airways Ltd., Ford Motor Co. and Starbucks Corp. have announced job cuts.

The government will publish a report tomorrow at 11:30 a.m. in Sydney showing second-quarter gross domestic product rose 0.4 percent from the previous three months, when it expanded 0.6 percent, according to the median estimate of 23 economists surveyed by Bloomberg.

Inflation Threat

``Given the opposing forces at work, considerable uncertainty has surrounded the outlook for demand and inflation,'' Stevens said today. ``On balance, however, it is looking more likely that household demand will remain subdued and overall economic growth slow over the period ahead.''

Inflation ``is likely to decline over time, provided wages growth remains contained,'' said Stevens, who forecasts consumer-price gains will fall to below 3 percent during 2010.

Central bank policy makers ``are signaling that each coming meeting is a month-to-month proposition,'' said Stephen Walters, chief economist at JPMorgan Chase & Co. in Sydney. ``We expect another cut this year, but probably not in October. They are in no rush.''

Stevens, along with his counterparts in Europe, Asia and the U.S., faces the challenge of balancing slowing household spending, which accounts for about 60 percent of Australia's economy, with the threat that inflation will accelerate amid rising energy costs and a shortage of skilled labor.

To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net