Australia May Cut Rate by Half-Point for First Time Since 2001

By Jacob Greber

Oct. 7 (Bloomberg) -- Australia's central bank will probably cut its benchmark interest rate by a half point, the biggest reduction in more than seven years, to cushion the nation's economy against fallout from slowing global growth.

Governor Glenn Stevens will lower the overnight cash rate target to 6.5 percent from 7 percent at 2:30 p.m. in Sydney today, adding to last month's quarter-point reduction, according to 16 of 21 economists surveyed by Bloomberg News. Five forecast a quarter-point cut.

Turmoil on financial markets, falling consumer spending and the slowest growth in home borrowing in 22 years have stoked speculation Stevens will cut rates by most since April 2001, when the global economy slumped following the collapse of the Internet bubble. Turmoil on credit markets has driven up the cost of funding, prompting Australian lenders to signal they may not pass on all of the central bank's reduction.

``Australia's economy will go into recession if today's elevated lending rates aren't reduced with some urgency,'' said Rory Robertson, a strategist at Macquarie Group Ltd. in Sydney. ``The interest-rate increases that were required to slow the economy now seem excessive, maybe a percentage point or two too high.''

The central bank cut the benchmark rate a month ago after pushing borrowing costs to a 12-year high with a dozen quarter- point increases between May 2002 and March this year.


Concern that domestic demand ``could weaken more sharply than necessary'' was a key reason Stevens reduced the rate on Sept. 2, even after inflation accelerated above his target range of between 2 percent and 3 percent.

Recession Risk

``A 50 basis points rate cut is possible, entirely defensible and justified given the mounting risks of a global recession,'' said Craig James, a senior economist at Commonwealth Bank of Australia in Sydney. Europe, the U.K., Japan and the U.S. ``are all on the verge of recessions.''

Households reduced spending in the three months through June this year for the first time since 1993, causing quarterly gross domestic product to expand just 0.3 percent, the slowest pace in more than three years.

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

Home Loans

Credit provided by banks and financial institutions to home buyers rose 0.4 percent in August, the smallest monthly increase since 1986, and house-building approvals fell for a second month.

Today's potential interest-rate reductions may not be enough to boost consumer spending, according to Gerry Harvey, chairman of Harvey Norman Holdings Ltd., Australia's biggest furniture and electronics retailer.

``We've got a massive loss of confidence and, while you can easily slash interest rates here, it's not going to pump sales up the next day,'' Harvey said in an interview on Sept. 30.

A Westpac Banking Corp. gauge of consumer confidence showed pessimists outnumbered optimists in September for an eighth month. August business sentiment was near a seven-year low.

Waning consumer spending and confidence is being partially offset by a China-driven mining boom. Soaring coal and iron ore exports helped generate a trade surplus in August of A$1.36 billion ($1 billion), the second-largest windfall on record.

``As things currently stand, the Reserve Bank is risking spectacular failure with its inflation-targeting regime if it cuts rates too much too early,'' said Joshua Williamson, a senior strategist at TD Securities Ltd. in Sydney.

Inflation Accelerating

Inflation reached 4.5 percent in the second quarter and is forecast by the central bank to peak at 5 percent later this year before slowing back within the bank's target range in 2010.

Speculation that Stevens may cut the benchmark rate by a half point mounted last week after the global credit squeeze drove up the cost of funding for banks and hampered their ability to pass on official rate reductions in full.

Prime Minister Kevin Rudd said lenders ``are not immune from the impact'' of rising finance costs and that he expects ``a maximum pass through'' to borrowers of any cut to the benchmark rate.

Political opponents led by Opposition leader Malcolm Turnbull, a former Goldman Sachs Group Inc. banker, seized on the comments as evidence the government has ``run up the white flag'' on banks, which are ``profitable enough to pass on in full any rate cut.''

A half-point reduction in mortgage rates would reduce repayments on an average A$250,000 home loan by almost A$90 a month, according to the Real Estate Institute.

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