RBA cuts rate by 100 bps to record low of 3.25%

The Reserve Bank of Australia (RBA) cut its key interest rate by 100 basis points to a record low of 3.25%, as policy makers in Australia scrambled to avoid the worst recession since World War Two. Earlier, Prime Minister Kevin Rudd announced a A$42 billion stimulus plan to boost infrastructure investment and consumer spending in New Zealand's largest trading partner. Economists had expected a 100 basis point cut. The cut took Australia's key rate back below the Reserve Bank of New Zealand's official rate of 3.5%, following a 150 basis point cut by the RBNZ last week. The Rudd government said it would invest A$28.8 billion in infrastructure, schools and housing, and give A$12.7 billion in cash payments to low and mid-income earners in March. Australian Prime Minister Kevin Rudd labeled the government's second stimulus package as a "nation building and jobs plan," saying he expected it to provide a boost to economic growth of around 0.5% of GDP in 2008-09, and around 0.75% to 1% of GDP in 2009-10. With the Australian economy heading into recession, the stimulus package was bigger than economists had expected. Following the announcement of the plan, the Rudd government halved its 2008/09 growth forecast to 1%, and forecast unemployment to rise to 7% by mid-2010. Here is the full statement from RBA Governor Glen Stevens:

At its meeting today, the Board decided to reduce the cash rate by a further 100 basis points, to 3.25%, effective 4 February 2009. There was a significant deterioration in world economic conditions late in 2008. The effects on household and business confidence of the financial turmoil following Lehman's collapse, and continuing strains on major financial institutions, saw a significant downturn in demand around the world. As a result, the major advanced economies contracted sharply in the December quarter, as did a number of emerging market economies. The Chinese economy, though still growing, has slowed markedly. Global inflation, having reached high rates during the middle of 2008, is now declining. Measures to stabilise financial systems have contributed to an improvement in the functioning of credit markets over the past couple of months. This, in conjunction with expansionary macroeconomic policy measures being taken around the world, should assist in promoting global recovery over time. But the near-term outlook for the global economy is the weakest for many years. Economic conditions in Australia have also been affected, though less than in other advanced economies. Australia's financial system remains in a strong condition and large interest rate reductions over recent months have been passed through in substantial measure to end borrowers. Nonetheless, the combination of last year's financial turmoil, a severe global downturn and substantial falls in commodity prices has had a significant dampening effect on confidence, and therefore on prospects for growth in demand. Inflation has begun to moderate and, given recent developments, it is likely to continue to decline. In these circumstances, the Board judged that a further sizable reduction in the cash rate was appropriate, to give further support to demand. In making its decision, the Board took into account the package of measures announced by the Government earlier today. The combination of expansionary monetary and fiscal policies now in place will help to cushion the Australian economy from the contractionary forces coming from abroad.