Asian economy worries prompt rate cut in Australia

Updated October 7, 2008 22:36:25

The global financial crisis has prompted Australia's central bank to deliver a one percentage point cut to official interest rates, for the first time in 16 years. The Resere Bank says the big rate cut was prompted in part by evidence that economic grow in Asia was easing which it says could have a worse than expected effect on Australia's economy. The Reserve Bank's surprise move sparked a dramatic recovery on the Australian sharemarket.

Presenter: Michael Cavanagh
Speakers : Australian Prime Minister Kevin Rudd, Australian Chamber of Commerce CEO Greg Evans, Westpac analyst Bill Evans

CAVANAGH: The Australian Reserve Bank has not eased its foot off the brake, it has quickly removed it and pushed the accelerator hard to the floor. Its not that long ago that the Bank was worried about inflation and was keeping rates up to slow spending. No one saw this coming, the markets were expecting a drop of between 25 and 50 basis points. It was back in 1992 when the Central Bank which acts independently of the Government last made a similar cut , clearly overshadowing last month's quarter of a per cent reduction. The bank's move had an immediate impact on the financial markets with nearly two US cents shaved off the Australian dollar before it slightly recovered, following on from the previous overnight three year low of the dollar being at 70 US cents. With the 700 billion US dollar bail out package failing to win over the markets despite being passed, government's and financial institutions are clearly spooked, although Australian Prime Minister Kevin Rudd is determined to paint a picture of stability.

RUDD: There are lot of factors at work at the moment in global financial markets and as we have said repeatedly all year, Australia is not immune. The actions however that we take occur in the context that Australia being in robust economic and public finance and when it comes to the banks private financed compared with any other counttry or economy around the world."

CAVANAGH: The Reserve Bank backs up the relative strength of the local banking system, however it also points out that economic activity in the major countries is also weakening, that is no great revelation. However what will send shivers down the spines of investors is the Bank observing that "evidence is accumulating of a significant moderation in growth in Australia's trading partners in Asia." Australia has managed to weather the storm because many Asian country's in particular China and India's insatiable appetite for commodities. The bank's concerns possibly reflect the sentiments of business. One of the country's major business lobby groups, the Australian Chamber of Commerce and Industry regularly survey's its members on business confidence. For the September quarter poll members expect growth to slow, unemployment to rise and sales are below their five year average. Despite the gloomy outlook the Chamber's Greg Evans is optimistic.

EVANS: We don't believe that there will be a recession, we think that the economic fundamentals of Australia are still basically sound and if you look at the budget surplus our regulatory environment and in fact the strength of our export sector we think that all these combined should avoid a recession. And certainly this pre-emptive action by the Reserve Bank with respect to interest rates will as I indicated reduce borrowing costs for Australian businesses and this should have a positive impact.

CAVANAGH: The Reserve's action is regarded as a positive by Bill Evans who is the Global Head of Economics for Westpac, one of Australia's major four banks.

EVANS: Most importantly it will mean the Reserve Bank is on the front foot here is aware of the concerns and is prepared to act very boldly.

CAVANAGH: Amidst this the political bunfight has begun with pressure on domestic banks to pass on as much of the official cut as possible to borrowers, the government being cautious pointing out the increased cost of money for banks is making it difficult, the conservative opposition saying the entire cut should flow through.