Australia Central Bank Says Rate Cuts to Stoke Growth

By Jacob Greber and Tracy Withers

Feb. 17 (Bloomberg) -- The Australian central bank’s decision to cut interest rates to a 45-year low and A$42 billion ($27 billion) in government stimulus spending will help stoke economic growth later this year, policy makers said.

The measures will “help to cushion the economy from the contractionary forces coming from abroad,” and should be “conducive to stronger demand later in the year,” the Reserve Bank of Australia said in minutes of its Feb. 3 meeting, released in Sydney today. Still, it said the stimulus will “take time to be effective” and will have “only a modest effect on the near-term.”

The nation’s currency fell on speculation Governor Glenn Stevens will cut rates again next month to prevent the economy from contracting in the first half of this year as global demand for exports drops. Stevens and his board slashed the benchmark lending rate two weeks ago by one percentage point to 3.25 percent. As well, the government will begin distributing cash handouts to families of up to A$900 from next month.

A March reduction in interest rates “is very much alive, probably a 50-50 call and they will cut if sentiment remains subdued,” said Adam Carr, a senior economist at ICAP Australia Ltd. in Sydney.

“While domestic economic conditions may justify a wait- and-see approach to assess the effectiveness of cuts so far, the bank is also saying near-term prospects” are weaker for the global economy, Carr added.

Currency Falls

The Australian dollar fell to 64.53 U.S. cents at 12:48 p.m. in Sydney from 65.14 cents before the report was released. The yield on the two-year government bond dropped 6 basis points, or 0.06 percentage point, to 2.74 percent. The benchmark S&P/ASX 200 stock index shed 1.1 percent to 3477.90.

Monetary and fiscal policy moves mean a “very significant macroeconomic stimulus had been applied to the domestic economy,” today’s minutes said.

The bank’s five rate cuts in the last six months had occurred “relatively early in the business cycle and lending rates in many cases would soon be at generational lows,” the statement said.

“A quiet confidence is being expressed by the Reserve Bank board,” said Craig James, a senior economist at Commonwealth Bank of Australia in Sydney. “There is no urgent need to stimulate the economy, there has been enough put out there.”

Australia’s economic growth was probably “broadly flat in the December quarter, a relatively good result in comparison with other developed nations,” the bank said today.

Bank Forecasts

Gross domestic product expanded 0.1 percent in the third quarter, the weakest pace in eight years. Figures for the last three months of 2008 will be published on March 4.

Central bank officials cut their forecasts for economic growth and inflation earlier this month as demand for exports declines amid deepening recessions in Japan, the U.S., and Europe.

Gross domestic product will rise 0.25 percent in the 12 months through June, compared to a November prediction of 1.5 percent, the bank said on Feb. 6.

“The primary backdrop to members’ policy discussion this month was the marked deterioration in world economic conditions late in 2008,” today’s minutes said.

Japan’s economy shrank at an annual 12.7 percent pace last quarter, the most since the 1974 oil shock, a report showed yesterday. The U.K. economy will contract 3.3 percent this year as the credit famine plunges the nation deeper into the worst recession in almost 30 years, the Confederation of British Industry said on Feb. 16.

‘More Resilient’

China, Australia’s largest trade partner, said on Feb. 11 that exports fell last month by the most in almost 13 years, tumbling 17.5 percent, as demand dried up in the U.S. and Europe.

Australia is being “affected by these global events, though, to date, the Australian economy had been more resilient than other industrial economies,” today’s minutes said.

“Nevertheless, the headwinds from the global economy were very strong and would continue to have a significant negative effect on the domestic economy in the near term,” they added.

The central bank said on Feb. 6 that Australia’s jobless rate will “increase materially over the year ahead” as falling prices for resources, including coal and iron ore, trigger a 20 percent drop in earnings from exports.

BHP Billiton Ltd., the world’s largest mining company, said last month it will cut 3,400 jobs in Australia as it shuts a nickel mine, closes part of a refinery and reduces coking coal output by as much as 15 percent.

Job Losses

The nation’s jobless rate rose to 4.8 percent in January, the highest level since June 2006, business confidence tumbled in to a record low, advertisements for job vacancies slumped for a ninth month and consumer confidence declined this month, recent reports showed.

Home-loan approvals jumped in December by the most in almost nine years, stoked by demand from first-home buyers after the government tripled a grant for new homes to A$21,000, a report showed last week.

Investors have a 100 percent expectation the central bank will cut the benchmark rate on March 3 by half a percentage point, according to a Credit Suisse Group index based on swaps trading.

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