Australian interest rate cut 100bp to 4.25%

The Reserve Bank of Australia (RBA) reduced its overnight interest rate today by 100bp to 4.25% - the lowest level since records began in 1990.

Glenn Stevens, governor of monetary policy for the bank, said: "Recent actions by governments and central banks to stabilise their respective financial systems have begun to take effect. Nonetheless, financial market sentiment remains fragile".

The RBA raised the overnight rate to 7.25% in March "in order to contain and reduce inflation over the medium term", Stevens said, but has cut it by three percentage points since then. The bank said today's cut was intended "to take monetary policy to an expansionary setting".

Looking forward, Stevens predicts that in 2009 global inflation will moderate significantly as a result of weak economic conditions in the major markets, a significant slowing in many emerging market countries, as well as falling commodity prices.

The governor believes that "global disinflationary forces" will also affect the Australian markets, yet he notes that the depreciation of the Australian dollar could slow the achievement of the 2-3% inflation target.

In the year to date, the Australian dollar has depreciated 26.1% against the US dollar, from $0.88 to A$1 on January 1 to $0.65 at close of trade today.

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