Australia's Reserve Bank yesterday pruned official interest rates by 50 basis points, amid signs of an economy slowing faster than expected and fears of a hard landing in the United States.
The bank's reduction in rates from 6.25 per cent to 5.75 per cent, although greetedwith relief by business, was matched by demands for further cuts in the year ahead to prop up demand and avert any slide towards recession.
The cut was a major boost to the battered housing sector and welcomed by industry, with predictions that the move would lift plummeting business confidence, although most groups described it as a good start.
But it was expected to have little impact on New Zealand's Reserve Bank, as it sees the economy still expanding from export-led growth.
Australian business expects further reductions in rates over the year, said Mark Paterson, chief executive of the Australian Chamber of Commerce and Industry.
Treasurer Peter Costello denied the RBA was targeting incipient recession rather than inflation, but both he and the bank's Governor, Ian Macfarlane, made clear their concern at the clouds gathering over the US and the effect this could have on the Australian economy.
"This will be a challenge ... But we have got to make sure that we strengthen the Australian economy so that it can ride it out," he said.
Mr Macfarlane said the United States economy had slowed faster than expected, which would dampen growth in the world economy this year.
The US slowdown was one of four key factors in the bank's decision to reduce cash rates.
Mr Macfarlane said consumer inflation remained low, despite rising wholesale prices caused by a weak Australian dollar, and underlying inflation was running at about 2 per cent, allowing for the effects of the introduction of GST and rising oil prices.
Inflation was expected to remain in the 2-3 per cent target zone in the coming year.
The bank also noted tumbling business confidence, a softening labour market and sluggish domestic demand, but Mr Macfarlane said the Australian economy still showed signs of considerable resilience.
