Australia cuts interest rate

Australia’s central bank cut its official interest rate by a bigger-than-expected 1% today to ease credit concerns amid a global financial turmoil, cheering investors around the region.

The cut to 6% was the largest by the Reserve Bank of Australia since May 1992. Analysts had expected the RBA to drop the rate by 0.5%.

Australian stocks climbed into positive territory after opening sharply lower.

Other Asian markets also gained after the move.

RBA Gov Glenn Stevens said in a statement that the central bank had judged that a large cut in the cash rate was needed after studying the outlook for global growth and its likely effect on Australia.

“Conditions in international financial markets took a significant turn for the worse in September,” Mr Stevens said.

“Large-scale financial failures in several major countries were accompanied by serious dislocation in interbank markets and heightened instability in other markets, including sharp falls in share prices.”

He also referred to evidence of “a significant moderation in growth in Australia’s trading partners in Asia”.

Mr Stevens said financing around the world would be difficult for “some time” and noted that Australia was affected less than other countries “given the relative strength of the local banking system”.

The move follows a quarter-point reduction last month that was the first decrease in nearly seven years.

Investors responded to the move immediately, lifting Australia’s benchmark S&P/ASX-200 index nearly 2% to 4,628.9 in the hour after the announcement.

Prime Minister Kevin Rudd said the decision would help maintain the stability of the financial system and see Australia through “tough times ahead”.

It was not immediately clear whether banks would pass on the rate cut to their customers.

Saul Eslake, chief economist with ANZ Banking Group Ltd, welcomed the cut as “extraordinary and bold”.

“They are clearly very concerned about the financial crisis and its potential impact on global growth, on Asian economies which they specifically mention, and on commodity prices,” Mr Eslake said.

“I think it will be seen firstly as contributing to the health of the financial system and a big step to reducing the downside risks to economic growth, provided it isn’t interpreted as panic.”

The cut came even though inflation is at 4.5%, well above the RBA’s target range of 2-3%.