Australia cuts rates and unveils $26bn stimulus to fight recession

Australia's ailing economy got a double dose of desperately needed stimulus yesterday as the government pledged billions in new spending to avoid recession and the central bank cut interest rates to record lows.

The news lifted the Australian dollar off 10-week lows against the dollar and bill futures, which had factored in the possibility of a bigger rate cut, fell.

"Australia is facing an unfolding national and international economic emergency," Prime Minister Kevin Rudd said in announcing A$42 billion ($26.5bn or Dh97.33bn) in stimulus spending to protect the Australian economy from the global financial crisis.

The plan includes A$28.8bn for infrastructure, schools and housing, as well as A$12.7bn cash payments for low and mid-income earners to be paid in March.

"It is a strategy to which we will add in the future as is necessary," Rudd said.

Hours after the government announced its spending plan, the Reserve Bank of Australia (RBA) cut its key cash rate by a bold one percentage point to a record low 3.25 per cent, citing the grimmest global outlook in many years.

The cut was in line with market expectations and brought the easing since September to a massive four percentage points. Investors are counting on further cuts to take the cash rate to two per cent or less by May.

"Policy settings in Australia are now very stimulative," said Michael Blythe, chief economist at Commonwealth Bank.

"The RBA may want to judge what impact these cuts and the stimulus package has on the economy before moving further, but still, it would rather cut too much than not cut enough," he said.

The Australian dollar rose as high as $0.6421 from $0.6350 before the rate decision, well above $0.6248 – a 10-week low – traded in offshore markets in anticipation of the rate cut.

The latest package takes Australia's total stimulus spending announced since last September to A$78bn, or nearly eight per cent of gross domestic product, and adds to a raft of similar plans from major economies, including one for $819bn in the United States.

The extra spending and deteriorating global financial conditions meant the government budget would fall into a deficit of 1.9 per cent of GDP in the 2008-09 financial year ending this June and 2.9 per cent the following year.

Rudd said his stimulus moves would stave off recession in the A$1 trillion export-driven economy, but not everyone agreed.

"It is not enough to ward off a recession. Nothing Australia will do will stop recession here because it is recession everywhere," said Chris Richardson from Access Economics. Six of Australia's top 10 trading partners are already in recession.

Japan's exports fell by a third in December, and South Korea this week reported a similar drop for January, reflecting the slump in global demand.

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