Australia to Extend Biggest Rate-Cut Round Since 1991

By Jacob Greber

Dec. 2 (Bloomberg) -- Australia’s central bank will probably cut borrowing costs to a six-year low, extending the biggest round of interest-rate reductions since a recession in 1991, amid signs the economy is close to stalling.

Governor Glenn Stevens will lower the overnight cash rate target to 4.5 percent from 5.25 percent at 2:30 p.m. in Melbourne today, according to 15 of 21 economists surveyed by Bloomberg News. A separate survey shows third-quarter economic growth probably was the weakest since 2002.

Stevens, who says Australia’s biggest mistake would be to talk itself into a recession, aims to restore consumer and business confidence battered by this year’s 44 percent slump in the benchmark S&P/ASX 200 Index of stocks and the biggest drop in house prices since 1978. The bank said last month it has scope to support growth as inflation slows.

“The angst as to whether we’re in a recession or not is reaching fever pitch,” said Adam Carr, a senior economist at ICAP Australia Ltd. in Sydney. “I don’t think the Australian economy is that fragile, but monetary policy is being eased to ward off the global recession’s impacts.”

Stevens and his board cut the benchmark rate by a quarter percentage point in September, followed by a one percentage point reduction in October and a three-quarter point adjustment last month. Today’s meeting is the last scheduled gathering of policy makers until Feb. 3.

Global Cuts

Central banks around the world are slashing interest rates in response to a global slump in demand. The Reserve Bank of New Zealand will probably cut its benchmark by a record 1.5 percentage points to 5 percent on Dec. 4, according to 10 of 17 economists surveyed by Bloomberg.

The Bank of England and the European Central Bank will also lower borrowing costs this week, according to separate surveys.

Australia’s central bank forecast last month that non-farm gross domestic product growth will slow to 1 percent in the 12 months through June from 2.5 percent a year earlier.

GDP growth probably slowed in the three months through September to 0.2 percent from the previous quarter, when it expanded 0.3 percent, economists forecast. That would cut annual growth to 1.9 percent, the smallest gain since the second quarter of 2002. The GDP report will be released tomorrow at 11:30 a.m. in Sydney.

“I hope we don’t slip into negative growth, but you have to accept that it’s possible,” National Australia Bank Ltd. Chairman Michael Chaney said yesterday. “It’s in the interests of everybody for demand to be sustained at a reasonable level.”

Mining Boom

Unlike the U.S., Japan, Europe and U.K., Australia’s economy has so far avoided a recession, boosted by a mining boom that has kept unemployment close to the lowest level in more than three decades. The jobless rate was 4.3 percent in October.

The current account deficit, Australia’s broadest measure of trade, narrowed to A$9.74 billion ($6.2 billion) in the third quarter as exports of coal and iron ore increased, the statistics bureau reported today.

To buttress the economy, Prime Minister Kevin Rudd signaled last week that he may allow the government’s budget to slip into deficit for the first time since 2002.

The government agreed with state leaders on Nov. 29 to spend A$15.1 billion mainly on health and education, to generate 133,000 jobs. Rudd is also giving A$10.4 billion in cash grants to the elderly, first-home buyers and families.

‘Biggest Mistake’

“Given the underlying strengths of the economy, about the biggest mistake we could make would be to talk ourselves into unnecessary economic weakness,” Governor Stevens said Nov. 19.

Policy makers aim to strike a balance between bringing inflation, which surged to 5 percent in the third quarter, back within the bank’s target range of between 2 percent and 3 percent, while avoiding “an unnecessary weakening in demand,” Stevens said last month.

The Reserve Bank expects the inflation rate will fall back within the target range in 2010. A TD Securities Ltd. index, published yesterday, showed consumer prices gained 3 percent in the 12 months through November, the smallest increase in more than a year.

“The Reserve Bank will be forced to cut the cash rate toward 2.5 percent by the middle of 2009” if a domestic recession increases the threat of deflation, said Joshua Williamson, a Sydney-based economist at TD Securities.

There is also rising concern that the property market may follow declines in the U.S. and U.K. after Australian house prices fell 1.8 percent in the third quarter, the most in 30 years.

Stevens “knows it was the 20 percent drop in home prices that poisoned the U.S. and U.K. banking systems,” said Rory Robertson, an economist at Macquarie Group Ltd. in Sydney. “Limiting the drop in average home prices is an unstated but obvious objective of increasingly easy Reserve Bank policy.”

A three quarter percentage point cut in mortgage rates would reduce repayments on an average A$250,000 home loan by about A$130 a month.

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