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Australia in shock one percent interest rate cut

The Sydney News.Net
Tuesday 7th October, 2008

In the first sign that central banks will seriously combat rcession fears, Australia's Reserve Bank stunned markets Tuesday by cutting official interest rates by a full percentage point.

While an interest rate cut was expected from the Reserve Bank's regular monthly meeting, traders were caught by surprise as only a 25 or 50 basis points cut was expected.

The central bank dropped its officiaL cash rate from 7 percent to 6 percent, just a month after a 1/4 point cut from 7.25 percent to 7 percent.

Tuesday's cut was the biggest one-day move in sixteen years.

"The recent deterioration in prospects for global growth, together with much more difficult market conditions even for creditworthy borrowers, now present the risk that demand and output could be significantly weaker than earlier expected," Reserve Bank governor Glenn Stevens said in a statement after the meeting.

"Conditions in international financial markets took a significant turn for the worse in September," he said. "Large-scale financial failures in several major countries were accompanied by serious dislocation in interbank markets and heightened instability in other markets, including sharp falls in share prices."

The Australian dollar, which had already lost almost a third of its value in the past two months on expectations of slower gloal ghrowth, and lower interest rates, initially dropped two cents on the RBA announcement, however it recovered to be trading above .72 cents, which is higher than its Monday close.

The Australian stock marked soared more than 3% on news of the interest rate cut. At the close of trading Tuesday, the benchmark S&P/ASX200
index was still up 1.72%.

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