By Jacob Greber Dec. 2 (Bloomberg) -- Australia’s central bank cut its benchmark interest rate by one percentage point, extending the biggest round of reductions since the nation was last in a recession in 1991. Governor Glenn Stevens lowered the overnight cash rate target to a six-year low of 4.25 percent in Melbourne today, the fourth reduction in as many months. Four of 21 economists surveyed by Bloomberg News forecast today’s move and 15 tipped a three-quarter point cut. Stevens said monetary policy is now “expansionary” to help restore consumer and business confidence, which has been battered by this year’s 44 percent slump in the benchmark stock index and the biggest drop in house prices since 1978. Three percentage points of cuts since September save borrowers with an average A$250,000 ($160,000) home loan more than A$500 a month. Today’s decision “is a vital element in the effort to ward off recession in Australia,” said Heather Ridout, chief executive of the Australian Industry Group, which represents the nation’s biggest companies. The Australian dollar traded at 64.05 U.S. cents at 3:26 p.m. in Sydney from 63.74 cents just before the Reserve Bank of Australia’s announcement. The two-year government bond yield rose 20 basis points, or 0.20 percentage point, to 3.13 percent. The S&P/ASX 200 stock index slumped 3.2 percent to 3,562.60 at 2:50 p.m. in Sydney, extending losses earlier in the day. Banks led the declines. ‘Cut Warranted’ “Weighing up the international and domestic developments of recent months, the board judged that a further significant reduction in the cash rate was warranted now, to take monetary policy to an expansionary setting,” Stevens said today in a statement. While Australia’s economy has been more resilient than “other advanced economies,” recent evidence indicates that “a significant moderation in demand and activity has been occurring,” he added. Gross domestic product growth probably slowed in the three months through September to 0.2 percent from the second quarter, when it expanded 0.3 percent, economists forecast. That would cut annual growth to 1.9 percent, the smallest gain since the second quarter of 2002. The GDP report will be released tomorrow. Global Reductions Stevens and his board also cut the benchmark rate by a quarter point in September, followed by a one percentage point reduction in October and a three-quarter point adjustment last month. Today’s meeting is the last scheduled gathering of policy makers until Feb. 3. Central banks around the world are slashing interest rates in response to a global slump in demand. The Reserve Bank of New Zealand will probably cut its benchmark by a record 1.5 percentage points to 5 percent on Dec. 4, according to 10 of 17 economists surveyed by Bloomberg. The Bank of England and the European Central Bank will also lower borrowing costs this week, according to separate surveys. “I hope we don’t slip into negative growth, but you have to accept that it’s possible,” National Australia Bank Ltd. Chairman Michael Chaney said yesterday. “It’s in the interests of everybody for demand to be sustained at a reasonable level.” Unlike the U.S., Japan, Europe and the U.K., Australia’s economy has so far avoided a recession, boosted by a mining boom that has kept unemployment close to the lowest level in more than three decades. The jobless rate was 4.3 percent in October. Budget Deficit To buttress the economy, Prime Minister Kevin Rudd said last week that he may allow the government’s budget to slip into deficit for the first time since 2002. The government agreed with state leaders on Nov. 29 to spend A$15.1 billion, mainly on health and education, to generate 133,000 jobs. Rudd is also giving A$10.4 billion in cash grants to the elderly, first-home buyers and families. Rudd’s spending package, this year’s 27 percent drop in the Australian dollar and “significant policy stimulus will be supporting demand over the year ahead,” Stevens said today. Australia’s three largest banks reduced their variable home-loan rates after today’s central bank announcement. Commonwealth Bank of Australia, the nation’s biggest provider of mortgages, cut the interest rate for its standard variable mortgages by 1 percentage point to 6.7 percent. National Australia trimmed by the same amount and Westpac Banking Corp. adjusted its rate by 80 basis points. Property Market Next year will “see a significant shift in sentiment towards property investments, with many Australians taking advantage of the lower interest rates,” said Warren McCarthy, managing director of real estate company LJ Hooker. Recent reports show the economy is slowing as consumers and businesses trim spending. Company investment growth cooled in the third quarter, business confidence plunged in October to a record low and consumers were pessimistic in November for a 10th straight month. House prices fell 1.8 percent in the third quarter, the most in 30 years. “We welcome this substantial rate relief,” Australian Treasurer Wayne Swan told parliament today in Canberra. “This is a vital rate cut, delivered at a time when all our joint efforts are directed toward strengthening the economy.” The Reserve Bank expects the inflation rate will fall back within its target range of between 2 percent and 3 percent in 2010. To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net

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