Australia cuts key interest rate; will other nations follow?

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Australia’s central bank cut its benchmark short-term interest rate on Tuesday, in what could be the first of a round of reductions by the world’s major central banks.

Or so battered financial markets are hoping.

The Reserve Bank of Australia sliced its overnight target rate to nearly a one-year low of 6%, from 7%.

‘Conditions in international financial markets took a significant turn for the worse in September,’ Glenn Stevens, governor for monetary policy, said in a statement. ‘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 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 [in Australia] could be significantly weaker than earlier expected,’ Stevens said.

The Standard & Poor’s/Australian Stock Exchange 200 index closed up 1.7% to 4,618 on the news, after slumping 3.3% on Monday. The index is down 27% this year, one of the smaller declines among global markets.

The Australian dollar was modestly higher, at nearly 73 U.S. cents, after diving to 72.2 cents on Monday from 77.4 cents on Friday amid the world market rout.