VZCZCXRO1179
RR RUEHPT
DE RUEHBY #0353/01 0970703
ZNR UUUUU ZZH
R 070703Z APR 09
FM AMEMBASSY CANBERRA
TO RUEHC/SECSTATE WASHDC 1336
INFO RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHDN/AMCONSUL SYDNEY 4451
RUEHBN/AMCONSUL MELBOURNE 6232
RUEHPT/AMCONSUL PERTH 4495
RUEHWL/AMEMBASSY WELLINGTON 5722
RUEHLO/AMEMBASSY LONDON 2054
RUEHKO/AMEMBASSY TOKYO 3487
RUEHGP/AMEMBASSY SINGAPORE 1701
RUEHBJ/AMEMBASSY BEIJING 9430

UNCLAS SECTION 01 OF 02 CANBERRA 000353 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EEB AND EAP/ANZ 
 
TAGS: EFIN ECON AS
 
SUBJECT: RATES CUT IN RESPONSE TO WORSENING ECONOMIC NEWS 
 
REFTEL: A) Canberra 345; B) Canberra 214 
 
¶1. (U) SUMMARY: The Reserve Bank of Australia (RBA) today reduced 
interest rates by 0.25% in response to worsening global and domestic 
economic news and increased reports of job losses.  The RBA 
indicated that while monetary and fiscal policy changes to date have 
been significant, the further deterioration in the world economy 
since its last meeting and the consequential slowing of the 
Australian economy as well as rising unemployment justified a cut in 
rates.  END SUMMARY. 
 
 
DETERIORATING ECONOMY TRIGGERS RATE CUT 
 
¶2. (U) The RBA announced April 7 it would cut interest rates by 
0.25% to 3.0%.  As RBA Governor Glenn Stevens said in his statement 
today, the Australian economy is contracting, demand for labor is 
weakening, and although there are tentative signs of stabilization 
in China and other countries, sentiment is fragile in the US and 
other major economies. 
 
PREVIOUS RBA DECISION BASED ON OVER-OPTIMISM 
 
¶3. (U) The December quarter national accounts were released in March 
after the RBA's decision to hold rates (ref B) - and the minutes of 
the RBA's March meeting (released a few weeks later) wrongly 
forecast that the Australian economy would maintain positive growth. 
  In the event, the Australian economy actually shrank by 0.5% in 
the December quarter (seasonally adjusted).  RBA Assistant Governor 
Malcolm Edey later acknowledged that Australia faced the prospect of 
recession, with zero growth over the period to June 2009.  Recent 
economic news has supported this prediction. 
 
¶4. (SBU) On 1 April 2009, retail sales fell by 2% (seasonally 
adjusted) in February - the biggest monthly fall in almost a decade 
and a surprise to analysts who expected the previous rate cut to 
boost spending.  This slump suggests the first fiscal stimulus is 
fading as consumers pay down debt.  There have been increasing job 
losses in Australia, with more to come, with the Master Builders 
Association (in its March quarter survey) forecasting up to 100,000 
workers could be retrenched over the next 12 months, partly because 
of a drought in finance for construction projects.  Even the rare 
good economic news for Australia is short-term in nature - while 
Australia's trade surplus hit A$2.1 billion in February (more than 
double January's surplus of A$926 million) on the back of growing 
gold exports, with 33% growth in export sales over the year to 
February 2009 and a drop in imports due to falling consumption, 
export income is trending downwards sharply due to revised contract 
prices with China and Japan for iron ore and coal exports. 
 
THE LIMITS OF FISCAL POLICY 
 
¶5. (SBU) The Rudd government's May budget is expected to have 
official forecasts that the Australian economy will contract by at 
least 1% in 2009-10.  There has been a further deterioration in 
revenue collections since the unprecedented A$115 billion downgrade 
to revenue announced in February 2009 (over 4 years).  Although 
monetary and fiscal policy are not formally coordinated in 
Australia, the RBA is aware of the increasing boundaries on budget 
stimulus measures (if only because Ken Henry, the Secretary of the 
Treasury Department is a voting member of the RBA Board).  Finance 
Minister Lindsay Tanner warned on 5 April 2009 that the budget 
QMinister Lindsay Tanner warned on 5 April 2009 that the budget 
deficit could reach A$100 billion (US$70 billion) over the next 3 
years.  Tanner played down speculation of a third financial stimulus 
and warned of the "very serious challenge" Australia faced in terms 
of fiscal restraints. 
 
IMPACT OF INTEREST RATE CUTS; ROLE OF THE BANKS 
 
¶5. (SBU) Over the last 7 months, the RBA has now cut interest rates 
by 425 basis points.  The RBA has claimed deep interest rate cuts 
are helping insulate households from the worst of the international 
economic downturn and have increased the prospects for a recovery of 
the housing market.  On 25 February 2009, Reserve Bank Governor 
Stevens said the big banks still have room to lower interest rates. 
He noted the Big Four banks are facing less competition even though 
the banks have warned funding costs remain high, and they could 
struggle to pass on any future rate cuts. 
 
¶6. (SBU) COMMENT: The Reserve Bank's decision to cut rates again is 
 
CANBERRA 00000353  002 OF 002 
 
 
a response to its greater concern over the deterioration in the 
economy and the fading impact of the GOA's fiscal stimulus policies. 
 Falling employment, stock market (and retirement fund) asset 
destruction and fragile confidence are negative factors making 
recession more likely and the RBA has sought to reinforce the 
positive role of interest rate cuts in bolstering consumption and 
debt reduction.  END COMMENT. 
 
RICHE