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Rates at 45-year low as RBA fights recession

Reserve Bank slashes interest rates a further 100 basis points to a 45-year low of 3.25 percent

The Reserve Bank has slashed interest rates a further 100 basis points to a 45-year low of 3.25 percent.

The Reserve Bank of Australia (RBA) board cites “significant deterioration” in the global economy late last year for the widely-anticipated decision.

“The effects on household and business confidence of the financial turmoil following Lehman’s collapse, and continuing strains on major financial institutions, saw a significant downturn in demand around the world,” RBA Governor Glenn Stevens says in a statement.

Major advanced economies contracted sharply in the December quarter, he says, along with a number of emerging market economies, putting the brakes on global inflation.

Stevens says the Chinese economy, though still growing, has slowed markedly.

Measures to stabilise financial systems have at least contributed to an improvement in the functioning of credit markets over the past couple of months.

“This, in conjunction with expansionary macro-economic policy measures being taken around the world, should assist in promoting global recovery over time. But the near-term outlook for the global economy is the weakest for many years,” Stevens says.

Australia’s financial system remains strong, he says, with previous interest rate cuts passed on to borrowers.

“Nonetheless, the combination of last year’s financial turmoil, a severe global downturn and substantial falls in commodity prices has had a significant dampening effect on confidence, and therefore on prospects for growth in demand,” he says.

“Inflation has begun to moderate and, given recent developments, it is likely to continue to decline.

“In these circumstances, the Board judged that a further sizable reduction in the cash rate was appropriate, to give further support to demand.”

Stevens says the Board considered the economic stimulus package announced by the Federal Government earlier today.

“The combination of expansionary monetary and fiscal policies now in place will help to cushion the Australian economy from the contractionary forces coming from abroad,” he says.

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