Australia Cuts Rate by Most Since 1992; Stocks Rise

By Jacob Greber

Oct. 7 (Bloomberg) -- Australia's central bank cut its benchmark interest rate by one percentage point, the most since a recession in 1992, triggering a rebound in Asian stocks on speculation other countries will follow to unlock credit markets.

``Rumors are now circulating that today's aggressive move by the Reserve Bank of Australia is the precursor for coordinated rate cuts by global central banks,'' said Katie Dean, a senior economist at Australia & New Zealand Banking Group Ltd. in Melbourne.

Today's reduction, twice as much as economists forecast, took the overnight cash rate target to 6 percent, the lowest since November 2006. Banks around the world have been hoarding cash, driving up lending rates, even as central banks including Australia's pump money into the financial system.

Reserve Bank Governor Glenn Stevens said in Sydney today that ``an unusually large movement in the cash rate was appropriate in order to bring about a significant reduction in costs to borrowers.''

Australia's S&P/ASX 200 stock index jumped 1.7 percent to 4,618.7 at the close in Sydney, reversing a drop of 0.5 percent immediately before today's decision. The MSCI Asia Pacific Index pared a 3.2 percent loss before the rate decision, and was down 1.2 percent. Futures on the U.S. S&P 500 Index also rose.

The Australian dollar initially fell before rising to 72.72 U.S. cents at 5 p.m. in Sydney from 72.06 cents before the central bank announcement. The currency has tumbled 26 percent since hitting a 25-year high of 98.49 cents on July 16.

Credit Rout

The Reserve Bank reduced Australia's benchmark interest rate by a quarter point a month ago after pushing borrowing costs to a 12-year high with a dozen similar increases between May 2002 and March this year. None of 21 economists surveyed by Bloomberg News forecast the size of today's cut. Sixteen predicted a half point and five tipped a quarter point.

The bank's move came after a rout wiped more than $2 trillion from global markets yesterday, sending the Dow Jones Industrial Average to its first close below 10,000 since 2004.

``It's obvious there's a need for synchronized global rate cuts,'' said Rory Robertson, an economist at Macquarie Group Ltd. in Sydney. ``You've got the most savage tightening in financial markets in anyone's living memory and all the big central banks have sat on their hands.''

Robertson said the Bank of England is ``long overdue'' to slash borrowing costs by up to 1 percentage point, followed by the U.S. Federal Reserve and the European Central Bank.

ECB President Jean-Claude Trichet said policy makers discussed an interest-rate reduction on Oct. 2 for the first time since the credit squeeze began. Still, they left the benchmark unchanged at 4.25 percent.

`Shock Decision'

The ECB is due to meet again on Nov. 6, and Fed policy makers on Oct. 29. U.K central bankers, who meet Oct. 9, are forecast to lower their benchmark by at least 25 basis points.

Central banks in Thailand and South Korea also meet this week to review borrowing costs.

China will cut interest rates as many as five times by the end of 2009 and will step up spending to limit the effect of the ``global financial tsunami'' on the nation's economic growth, Hong Kong-based Morgan Stanley economist Qing Wang said today.

``This is a shock,'' said Stephen Walters, chief economist at JPMorgan Chase & Co. in Sydney, said of today's decision. ``The Reserve Bank is clearly realizing monetary conditions were way too tight and they needed to do something about it pretty quickly.''

Economy Slows

Australia's economy grew 0.3 percent in the three months through June, the slowest quarterly expansion since the end of 2004, as consumer spending contracted for the first time since 1993.

Home-buyers have also become less willing to borrow after companies such as Qantas Airways Ltd. and Ford Motor Co. started firing workers. Banks have taken ``a more cautious attitude to lending'' and tripled provisions for bad debts, according to a Reserve Bank report last month.

Credit provided by banks and financial institutions to home buyers rose 0.4 percent in August, the smallest monthly increase in 22 years, and house-building approvals fell for a second month.

Today's decision means the ``economy could come roaring back to life very quickly if we can solve the liquidity problem,'' said billionaire Gerry Harvey, chairman of Australian retailer Harvey Norman Holdings Ltd. ``I just worry about the liquidity.''

Global Threat

The threat of slower global growth, coupled with ``the most difficult market conditions even for creditworthy borrowers, now present the risk that demand and output could be significantly weaker than earlier forecast,'' Stevens said today.

The Reserve Bank said in August that gross domestic product would expand 2 percent this year, after growing 4.3 percent in 2007.

Commonwealth Bank of Australia and Westpac Banking Corp., the nation's biggest lenders, cut their standard variable home loan rates by 80 basis points today.

That will reduce the monthly repayments on an average A$250,000 ($182,000) mortgage by almost A$140. About 90 percent of Australian home buyers have variable interest-rate loans that traditionally move with the central bank's benchmark.

The central bank is ``responding to the fear that is out there,'' said Alan Oster, chief economist at National Australia Bank Ltd. ``People are really nervous and they're not sure what to do. They're not investing.''

Australian Prime Minister Kevin Rudd said the government ``welcomes the decisive action by the Reserve Bank.''

Australia's rate cut won't necessarily start a coordinated effort among the biggest central banks to reduce borrowing costs because the Bank of Japan met today and held its benchmark at 0.5 percent, said Tsutomu Komiya, an investment manager at Daiwa Asset Management Co. in Tokyo with the equivalent of $94.4 billion in assets.

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