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Massive Aussie rate cut of a full 1%


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The Reserve Bank of Australia cuts interest rates by 1%.

The Age reports:-

The Reserve Bank has stunned financial markets by announcing a full-percentage point cut – double what analysts had tipped – saying financial markets had taken a “significant turn for the worse.”

Australia’s official lending rate was lowered by the most since May 1992, although it is unclear how much of the 100 basis-point cut will be passed on to mortgage-holders and other borrowers as banks struggle to raise funds in overseas money markets.

The article notes:-

RBA Governor Stevens said overseas developments had forced the bank’s hand, with banks globally hoarding funds out of concern about each others’ reliability

Now what does this mean for NZ?

Stock market reaction in Australia:-

Just prior to today’s RBA decision, the benchmark S&P/ASX200 share index was down about 0.5% at 4519 points, clawing back a drop of as much as 3.3% earlier in the day. Overnight, European and US markets plunged on worries that the global economy with wither.

The initial response was for stocks to jump about 2%, to trade 1.5% higher for the day at 4,608 points.

What about the economy:-

Australia’s economy has held up better than most counterparts among rich countries in part because of the strength of the mining boom which has recently delivered the second-highest trade surplus on record and filled state and federal government coffers.

In recent months, though, many of Australia’s main trading partners have slipped into recession, while its biggest customer China has also signalled a slowdown in its growth.

Though growth for the year to September is seen as being about 2.2% a better performance than NZ.

The RBA did this despite having a relatively strong economy.

Should the NZ authorities be considering action here? Our two largest currency earners tourism and dairy are under heavy pressure and will likely be so for some time. Further our economy is not as diversified as others.

It will be very interesting to see what sort of package National comes up with tomorrow.

  1. 07/10/2008 19:37

    Hmm, I was looking at the exchange rate earlier and wondering why the Kiwi-Aussie cross had moved from 0.78 to 0.88 in less than a week.

    This could hurt our exporters, I think most were expecting the Kiwi to go even lower against the Aussie over the next few months, mind you the ten year average is 0.858 so they should be able to cope.

    Presumably this puts a little more pressure on the reserve bank to go for another big cut at the next review.


  2. 07/10/2008 19:32

    With interest rates so high here there’s room to move. But our banks have to borrow from overseas so unless rates there come down any change our RB makes con’t filter through to borrowers very quickly.


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