Australia Lowers Rate 1%, Stocks Plunge

Darlington Musarurwa
02 Dec, 2008
New York City

Reserve Bank of Australia lowered its key lending rate by 1% to 4.25%. The large rate cut spread worries among investors that the economy may be softer than estimated. ASX 200 index plunged 4.2%. RBA said that rate cuts are necessary to sustain economic expansion and global demand is likely to drop.

[R]3:00AM New York, 7:00PM Sydney- Reserve Bank of Australia cuts cash rate by 1%. Stocks plunge 4%.[/R]

Stocks in Australia plummeted after the central bank cut its key rate more than forecasted raising fears of a deepening recession and falling demand.

In Sydney trading ASX 200 index fell 4.2% or 153 to 3,528.20.

Of the ASX 200 index stocks 27 rose, 163 declined, and 10 were unchanged. Transfield Services led gainers in the index shares with a rise of 9.2% followed by Asciano Group advancing 8%.

Reserve Bank of Australia Cuts Rate

Reserve Bank of Australia elected to cut the cash rate by 100 basis points to 4.25% with effective from tomorrow. The central bank says financial market sentiment remains fragile on weak economic conditions in major countries and slowing economic activity in emerging countries.

Global inflation is expected moderate significantly in 2009 as commodity prices drop.

According to the report, though the Australian economy is resilient local demand has been moderating and “cautious behaviour by both households and businesses is likely to see private demand remain subdued in the near term”.

RBA noted that there is a need for a significant reduction in the cash rate to sustain the economic expansion.

“There has now been a major easing in monetary policy over the past few months. Together with the spending measures announced by the government, and a large fall in the Australian dollar exchange rate, significant policy stimulus will be supporting demand over the year ahead,” said the central bank in a statement.

Commonwealth Bank of Australia to Pass on Rate Cut

Commonwealth Bank of Australia reported today that it will cut its standard variable home loan and business lending rates and pass on the full one percentage point cut to interest rates from December 12.

Treasurer Wayne Swan said the rate cut will save $193 per month on an average $300,000 mortgage.

Similarly, National Australia Bank said it will cut its key lending rates by the full 1%, while Westpac said it will pass on 80 basis points of the RBA’s 100-point reduction.

Gainers & Losers

Transfield Services led advancers in the ASX 200 index shares with a rise of 9.2% followed by increases in Asciano Group of 8%, in Australand Property of 7.1%, in Gud Holdings Ltd of 5.5%, and David Jones Ltd. of 5.1%.

Australand Property gained after Commonwealth Bank of Australia and National Australia Bank passes on the one percentage point cut in the interest rate.

Commodity stocks gained after gold prices rebounded $1.9 to $778.50 per ounce and crude oil prices edged up $0.60 to $49.40 a barrel.

NRW Holdings led decliners in the ASX 200 index shares with a loss of 26% followed by losses in HFA Holdings of 19.4%, in Mount Gibson Iron of 17.1%, in Boart Longyear Group of 16.1%, and Kingsgate Consolidated of 16%.