By Jacob Greber
Feb. 3 (Bloomberg) -- Australia’s central bank cut its benchmark interest rate by 100 basis points to the lowest level in more than four decades and the government announced it will spend another A$42 billion ($26 billion) to ward off a recession.
Governor Glenn Stevens lowered the overnight cash rate target to 3.25 percent in Sydney today, two hours after Treasurer Wayne Swan said the government will spend A$12.7 billion in handouts to families and A$28.8 billion on infrastructure, sending the budget into its first deficit since 2001-2002.
A slump in global demand for exports is cutting profits at companies including Alumina Ltd. and Incitec Pivot Ltd., driving up unemployment and eroding household sentiment. The bank’s five interest-rate reductions since September save borrowers with an average A$250,000 home loan more than A$680 a month.
“It’s all about maintaining the growth in the economy,” said Bill Evans, chief economist at Westpac Banking Corp. in Sydney. “Unfortunately, we’re getting to the point where monetary policy can do no more” and the government needed to increase spending to stoke growth.
The Australian dollar rose to 64.16 U.S. cents at 2:44 p.m. in Sydney from 63.50 cents just before the decision was announced. The two-year government bond yield gained 3 basis points to 2.45 percent. A basis point is 0.01 percentage point.
‘Cushion Economy’
“The combination of expansionary monetary and fiscal policies now in place will help to cushion the Australian economy from the contractionary forces coming from abroad,” Stevens said today.
Central bank policy makers “took into account the package of measures announced by the government earlier today,” Stevens added.
The economy would have contracted in fiscal 2010 without today’s stimulus, the government said. Swan estimates the extra spending will create 90,000 jobs over two years and help the economy grow 1 percent in the 12 months through June 2009 and 0.75 percent the following year.
“The weight of the global recession is now bearing down on the Australian economy,” Swan said. “It would be irresponsible not to act swiftly.”
Australia’s economy may already have followed the U.S., U.K., Japan and Europe into its first recession since 1991 after gross domestic product rose 0.1 percent in the third quarter, the weakest pace in eight years.
Companies Firing
GDP in Australia will probably shrink 0.2 percent this year, according to the International Monetary Fund, which last week revised its previous prediction of a 1.8 percent expansion. The IMF said global growth in 2009 will be the weakest in 60 years.
Miners BHP Billiton Ltd. and Rio Tinto Group, retailer Harvey Norman Holdings Ltd. and banks such as Australia & New Zealand Banking Group Ltd. are among companies firing workers as profits decline.
Reports published this year show the jobless rate rose to a two-year high of 4.5 percent in December as companies slashed 43,900 full-time jobs, bank lending unexpectedly fell for the first time since 1992, manufacturing contracted in January for an eighth month and house prices dropped for a third straight quarter.
“Things are going to be very difficult indeed,” said John Edwards, chief economist at HSBC Bank Australia Ltd. in Sydney. “But we also need to be conscious that our circumstances are very different” to other parts of the world.
“We limped through the fourth quarter last year, whereas other countries were in the most desperate circumstances.”
Profit Warnings
Alumina, partner in the world’s biggest producer of the material used to make aluminum, said today it had an 18 percent decline in second-half profit because of lower prices and higher costs. Fertilizer maker Incitec Pivot shares plunged to a record low after saying profit will fall.
The threat of a long and deep economic slump may prompt the Reserve Bank to cut the benchmark interest rate to less than 2 percent, former Governor Bernie Fraser said in an interview on Jan. 23.
“This recession will be deeper and longer than the last recession in 1991,” Fraser told Bloomberg News.
To offset stalling growth, Stevens and his board lowered borrowing costs in the last four months of 2008 by three percentage points. Today’s one-percentage-point reduction cuts the benchmark rate to the lowest level since February 1964, according to historical figures provided by the Reserve Bank.
Eleven of 20 economists surveyed by Bloomberg News forecast a one-percentage-point reduction and nine tipped a three- quarter-point adjustment.
Global Rates
Still, the nation’s benchmark rate remains among the highest in the developed world, dwarfing the U.S. Federal Reserve’s rate of as low as zero and higher than the European Central Bank’s 2 percent setting.
New Zealand Reserve Bank Governor Alan Bollard cut his benchmark last week to a record-low 3.5 percent and said he has scope for further reductions.
The Bank of England cut its benchmark last month to 1.5 percent, the lowest since the central bank was founded in 1694. The Bank of Japan has reduced its key lending rate close to zero.
Stevens also has the flexibility to cut borrowing costs again in coming months after the inflation rate fell last quarter by the most in 11 years. Consumer prices gained 3.7 percent from a year earlier, cooling from the third quarter’s 5 percent increase.
The Reserve Bank in December said it expects the inflation rate to fall back within its target range of 2 percent to 3 percent this year. Policy makers will publish new forecasts for inflation and growth on Feb. 6.
Budget Deficits
“Our economy has only started to feel the heat over the last three or four months,” John Symond, executive chairman of mortgage broker Aussie Group, said in an interview yesterday. “Unemployment is the danger and that’s spooking consumers. Over the next six months, we’ll probably see an ugly picture.”
Government spending to stimulate the economy, as well as a forecast A$115 billion drop in tax receipts over the fiscal years through June 2012, will result in deficits of A$22.5 billion in the 12 months through June 2009 and A$35.5 billion in 2009-10, Swan said.
Since October, the government has offered almost A$87 billion in aid for families, pensioners, bond markets, home buyers and extra spending on schools and roads.
Today’s spending is “a very aggressive fiscal stimulus, but given the state of the global economy, it’s completely warranted,” said Brian Redican, a senior economist at Macquarie Group Ltd. in Sydney.
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