By Jacob Greber Nov. 4 (Bloomberg) -- Australia's central bank cut its benchmark interest rate by a larger-than-expected three quarters of a percentage point, the third reduction in as many months, amid evidence global financial turmoil is buffeting the economy. Governor Glenn Stevens lowered the overnight cash rate target to 5.25 percent from 6 percent in Sydney today, adding to last month's 1 percentage point reduction. Fifteen of 16 economists surveyed by Bloomberg News forecast a half-point cut and one tipped a quarter-point drop. Falling house prices and retail sales plus October's 14 percent slump in the All Ordinaries Index of stocks, the biggest drop since 1987, have prompted Stevens to undertake the most aggressive round of rate cuts since the economy was last in a recession in 1991. The U.S., China, India, Japan and South Korea all lowered borrowing costs in the past week. ``The Reserve Bank will have to ease policy further,'' said Helen Kevans, an economist a JPMorgan Chase & Co. in Sydney. ``We are forecasting a recession.'' Weighing up international and domestic developments, the central bank ``board judged that a further significant reduction in the cash rate was warranted,'' Stevens said in a statement today. ``It appears likely that spending and activity will be weaker than earlier expected,'' he added. Currency Falls The Australian dollar fell to 66.51 U.S. cents at 4:16 p.m. in Sydney from 67.17 cents before decision was announced. The currency has tumbled 32 percent since hitting a 25-year high of 98.49 cents on July 16. Australia's benchmark S&P/ASX 200 stock index, which was 1.2 percent lower immediately before the cut, pared losses to fall 0.2 percent to 4,215.1 at the 4:10 p.m. close in Sydney. Shares of Harvey Norman Holdings Ltd., the nation's biggest furniture and electronics retailer, jumped 11 percent, the most in 15 years. Economists forecast the European Central Bank will cut its benchmark rate from 3.75 percent to 2.5 percent by April, with the next reduction coming on Nov. 6. The Bank of England will probably reduce its key rate on the same day by half a point to 4 percent, according to a separate survey. Stevens and his board have lowered borrowing costs by 200 basis points since the start of September. The combined reductions will cut repayments on an average A$300,000 ($200,000) home loan by about A$400 a month, according to Treasurer Wayne Swan, who said today's decision will help strengthen the economy. Inflation Fight ``I want to see banks pass on this cut in full as rapidly as possible,'' Swan told reporters in Canberra. Commonwealth Bank of Australia, the nation's biggest mortgage lender, said it will cut its variable home-loan rates by 58 basis points, 17 basis points less than today's central bank reduction. Policy makers raised the benchmark rate 12 times between 2002 and March this year to a 12-year high of 7.25 percent to curb inflation that has surged to 5 percent. The Reserve Bank in August said inflation will probably peak in the fourth quarter, before easing back within its target range of between 2 percent and 3 percent in 2010. ``It is reasonable to expect that inflation in Australia will soon start to fall,'' Stevens said today. ``Global disinflationary forces will assist in this regard, though the depreciation of the exchange rate means that the decline of the inflation rate to the target could take longer than would otherwise be the case.'' House Prices Australia's gross domestic product rose 0.3 percent in the second quarter, the weakest growth in more than three years, as consumers cut spending for the first time since 1993. House prices fell 1.8 percent in the third quarter, the biggest drop since the late 1970s. Retail sales tumbled in September by the most in three years and job advertisements slid for a sixth month, reports showed yesterday An index of manufacturing slumped in October to the lowest level since the Australian Industry Group began measuring output in 1992, another report showed yesterday. Unemployment, which dropped to a three-decade low of 3.9 percent in February amid a China-fueled mining boom, probably rose to 4.4 percent last month from 4.3 percent in September, according to the median estimate of 13 economists surveyed by Bloomberg News ahead of a Nov. 6 report. While the central bank's recent rate reductions will assist growth in the period ahead, ``deteriorating international conditions and falling commodity prices will have a dampening influence,'' Stevens said today. ``There have been further signs that China and other parts of the developing world are slowing as well,'' he added. To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net

Source