Edey Says RBA Rate Cut, Spending to Buffer Economy

By Jacob Greber and Candice Zachariahs

Nov. 19 (Bloomberg) -- The biggest round of Australian interest-rate cuts since a recession in 1991 and government cash handouts will cushion the economy against slower global growth and falling commodity prices, a central bank official said.

Still, non-farm gross domestic product will slow to 1 percent by the middle of 2009 and ``remain below trend for some time beyond that,'' Reserve Bank of Australia Assistant Governor Malcolm Edey said in a speech to business executives in Sydney today, reiterating forecasts made last week by the bank.

Central bank policy makers led by Governor Glenn Stevens have cut the benchmark interest rate since early September by two basis points to 5.25 percent to bolster the economy as global financial turmoil prompts consumers and businesses to pare spending. Stevens will cut the rate again on Dec. 2 by at least half a point, according to 22 economists surveyed by Bloomberg News.

Australia's leading economic index, published today by Westpac Banking Corp., signals the nation may slip into its first recession since 1991. The leading index fell 1 percent in September to 258.4 points and the annualized growth rate of the gauge slowed to 1.1 percent from 2.5 percent in August.

The Australian dollar rose to 64.62 U.S. cents at 3 p.m. in Sydney from 64.52 before Edey's speech was released. The two- year government bond yield fell 1 basis points, or 0.01 percentage point, to 3.4 percent.

Economic Cushion

Edey said the economy will benefit from the interest-rate adjustments, a 25 percent drop in the nation's currency over the past three months and A$10.4 billion ($6.7 billion) in government cash handouts to the elderly, first-home buyers and families. The payments will provide a ``near-term stimulus of a bit under 1 percent of gross domestic product,'' he added.

``All of these factors will help to cushion the effects of the much more difficult global environment in which we now find ourselves,'' Edey told the 2008 Australia & Japan Economic Outlook Conference.

``Even so, the forecasts we released last week envisage a significant further slowing in the Australian economy from the pace recorded at mid year,'' when GDP rose 2.7 percent from a year earlier.

The central bank cut its 2008 economic growth forecast last week to 1.5 percent from 2 percent and said it had been forced to made ``unusually large'' reductions in the benchmark rate in October and November because renewed global turmoil raised the risk growth will stall.

Uncertain Forecasts

Policy makers cut the overnight cash rate target by three- quarters of a percentage point on Nov. 4, adding to a one- percentage-point reduction in October and a quarter-point adjustment in September.

``It has to be emphasized that any forecasts in this environment are subject to a great deal of uncertainty, not least because the situation in world financial markets is still changing rapidly,'' Edey said.

``Substantial fiscal stimulus packages'' announced around the world including in Australia, as well as capital injections and bank deposit guarantees, ``should help to stabilize conditions over time, but sentiment is still fragile,'' he added.

In addition to volatility in financial markets, base metals prices have fallen by around 35 percent since early September.

``These are big movements, although it has to be acknowledged that the prices of some key resource commodities are still high in absolute terms,'' Edey said.

Edey also said Australian consumers may have entered a ``period of consolidation'' in which spending and borrowing grows at a slower pace than incomes.

``That adjustment, provided it remains orderly, should be helpful in laying the basis for sustainable growth in the longer term,'' he said.

Governor Stevens is scheduled to give a speech today, at 8:35 p.m. in Melbourne. It is titled ``The Economic Situation.''

To contact the reporters for this story: Jacob Greber in Sydney at jgreber@bloomberg.netCandice Zachariahs in Sydney at czachariahs2@bloomberg.net