australia may cut interest rate below 2%

Australia May Cut Interest Rate Below 2%, Fraser Says

Jan. 23 (Bloomberg) -- Australia’s central bank may more than halve its benchmark interest rate as the nation enters a long and deep recession, former Governor Bernie Fraser said.

Fraser, Reserve Bank of Australia chief during the nation’s last recession in 1991, said policy makers may reduce the overnight cash rate target to less than 2 percent from 4.25 percent now. The bank’s board gathers for the first time this year on Feb. 3.

“This recession will be deeper and longer than the last recession in 1991,” Fraser said in a phone interview from his home near Canberra. “The Reserve Bank could go below 2 percent; they will go as low as they need to and a further stimulus from the government will be required.”

Governor Glenn Stevens has undertaken the central bank’s biggest round of policy easing in almost two decades, slicing three percentage points off the key rate since early September. The economy grew 0.1 percent in the third quarter, the weakest pace in eight years, unemployment climbed to a two-year high of 4.5 percent in December and home-building approvals plunged by the most since 2002, evidence Australia may follow Europe, Japan and the U.S. into a recession.

Australia’s dollar fell to 65.32 at 2:30 p.m. in Sydney from 65.54 cents in late trading yesterday. Investors increased their bets today that the central bank will cut rates by 1 percentage point next month, according to a Credit Suisse Group index based on swaps trading.

‘Very Ugly’

“We’re embarking upon what may be one of the most troubled years of our age,” Prime Minister Kevin Rudd said two days ago. “It’s a very ugly thing to see.”

Treasurer Wayne Swan, said yesterday the nation is experiencing a “huge shock” and has vowed the government will unveil further stimulus if the global outlook worsens. Australia already has allocated close to A$45 billion ($30 billion) in aid for families, pensioners, bond markets, home buyers, and spending on infrastructure to revive growth.

“The government’s language has been all doom and gloom: they’re scaring the pants off people and we’re talking ourselves into this recession,” said Fraser, whose seven-year stint as governor ended in September 1996. “People are not about to spend their stimulus, which is exactly what needs to happen for confidence to improve.”

The economy’s 17-year expansion has been driven by global demand for commodities such as coal, iron ore and copper that sent unemployment down to a three-decade low, drove a housing boom and stoked consumer spending.

Domestic Slowdown

Now Australians are shutting their wallets as businesses from airlines to manufacturers fire workers. Westpac Banking Corp.’s consumer confidence index fell 2.2 percent in January to 89.9 points, indicating pessimists outnumber optimists.

David Jones Ltd., the nation’s second-largest department store chain, said this week profit growth will stall this year. Earnings at Harvey Norman Holdings Ltd., Australia’s biggest furniture and electronics retailer, dropped 32 percent in the first quarter.

“Things are going to be difficult in the economy for a while,” Fraser said. “It’s only going to get worse and that will be for an extended period of time as other economies around the world slow.”

Australia’s biggest trading partners, China and Japan, are faltering. China, which accounts for one-fifth of global growth, expanded at its weakest pace in seven years in the fourth quarter and Japan’s first recession since 2001 is deepening.

A slowdown in China will reduce Australian exports by A$5 billion, Rudd said last night. Prices for coal and iron ore shipped from Australia may drop significantly this year, the Reserve Bank said on Jan. 15. Australia’s exports are equivalent to about 20 percent of GDP.

Job Cuts

BHP Billiton Ltd. said this week it will cut 3,400 jobs in Australia as it shuts a nickel mine, closes part of a refinery and reduces coking coal output as much as 15 percent.

During Fraser’s time as governor, interest rates dropped from 17.5 percent in 1990 to as low as 4.75 percent by mid-1993, according to data on the central bank’s Web site. The key rate hasn’t fallen below 4.25 percent since the Reserve Bank began publishing its benchmark in 1990.

“The recession in 1991 was short, sharp and severe,” Fraser said. “Interest rates declined and the government delivered fiscal stimulus and the recovery occurred. This seems a different story and will much more drawn-out.”

Swan on Nov. 5 lowered his forecast for the government’s budget surplus this fiscal year by 75 percent. He has said the budget may fall into a “temporary deficit” as the economic slowdown cuts tax revenue.

“A budget deficit is the least of their worries,” Fraser said.

To contact the reporter on this story: Gemma Daley in Canberra at [email protected]

Last Updated: January 22, 2009 22:36 EST