By Jacob Greber
Nov. 10 (Bloomberg) -- Australia's central bank signaled it's prepared to add to the most aggressive interest-rate cuts in 17 years as it tries to ensure the economy sidesteps a looming global recession.
The bank today cut its 2008 economic expansion forecast to 1.5 percent from 2 percent and said it had been forced to make ``unusually large'' reductions in the overnight cash rate target in October and November because renewed global turmoil raised the risk growth will stall.
Governor Glenn Stevens has slashed the benchmark lending rate since early September by 200 basis points to 5.25 percent in the biggest round of cuts since a recession in 1991. Australia's weakening economy also means underlying inflation is now reaching a peak and will begin to slow in coming months, the bank said in its quarterly policy statement released in Sydney.
``There is still considerable scope for monetary policy to help the economy over the next 12 to 18 months,'' said Brian Redican, a senior economist at Macquarie Group Ltd. in Sydney. ``They are saying the economy will keep expanding, but it will be seriously affected by the global slowdown.''
Reserve Bank policy makers will cut the benchmark rate by another half point to 4.75 percent on Dec. 2, according to 12 of 19 economists surveyed by Bloomberg News last week. Five expect a quarter-point reduction, one tipped a three-quarter-point cut and one forecasts a 1 percentage point decline.
`Appropriate Balance'
``The board will be seeking to strike the appropriate balance between avoiding an unduly sharp weakening in demand and the need for inflation to fall back'' within its target range of 2 percent to 3 percent ``over a reasonable period,'' today's statement said.
The Australian dollar traded at 69.05 U.S. cents at 12:02 p.m. in Sydney from 68.95 cents just before the statement was released. The two-year government bond yield rose 2 basis points to 3.87 percent. A basis point is 0.01 percentage point.
The bank said falling global demand for commodities, with base metals prices down by an average of more than 30 percent this year, means ``it's clear that Australia's terms of trade have now peaked.''
Income from foreign sales is ``likely to subtract noticeably from national income growth over the year ahead,'' it said.
Growth Forecast
Gross domestic product will rise 1.75 percent in 2009, less than the 2.5 percent expansion forecast by the bank in its August statement. The bank also said GDP will gain 2.5 percent in 2010, compared with its previous prediction of 2.75 percent.
``A more rapid unwinding of the resources boom than has been assumed would have significant negative effects throughout the economy, resulting in softer growth in domestic incomes and spending,'' today's statement said.
``A number of resource companies are reconsidering their capital expenditure intentions for 2009, and smaller mining firms in particular are likely to cut back their investment,'' the bank said. That will ``flow through into slower activity in other sectors of the economy.''
Australian companies, including builders, are finding it harder to borrow money, the central bank said.
The International Monetary Fund is forecasting that the U.K., Japan, the euro region and the U.K. economies will all contract next year in their first simultaneous recession since the World War II.
G20 Action
The Group of 20 nations said in a statement yesterday following a meeting in Sao Paulo that it's prepared to act ``urgently'' to bolster growth and called on governments to cut interest rates and raise spending as the world's leading industrialized economies battle the threat of a recession.
Ongoing stress in financial markets means it is ``possible that the deterioration in the external environment could continue,'' the Reserve Bank said. ``Even if this did not occur, the effects on domestic activity of the deterioration that has already occurred could be deeper or more persistent than expected in this outlook.''
Australia's economy grew 0.3 percent in the second quarter, the slowest pace in more than three years, as households cut spending for the first time since 1993.
Recent reports showed house prices fell 1.8 percent in the third quarter, the biggest drop since 1978, retail sales tumbled in September by the most in three years and job advertisements slid for a sixth month.
Home-loan approvals fell 2.7 percent in September, the eighth month of declines, a separate report showed today.
Core inflation is likely to remain ``around 4.5 percent'' during the year through December 2008 and then ``decline gradually'' to 3.25 percent by mid-2010 and 2.5 percent by mid 2011, the bank said.
Three months ago, it forecast inflation to slow to 3 percent by the middle of 2010.
To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net
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