SYDNEY, September 2 – Australia\’s central bank cut interest rates Tuesday for the first time in over six-and-a-half years, pushing them down 25 basis points to seven percent amid signs of cooling economic growth.
"At its meeting today the Board decided to lower the cash rate by 25 basis points to 7.0 percent, effective 3 September," Reserve Bank of Australia governor Glenn Stevens said in a statement.
Financial conditions had been "quite tight" following rate hikes earlier this year and due to the impact of the global credit squeeze, Stevens said.
"Conditions in international financial markets remain difficult, with heightened concerns over credit persisting," he said.
The central bank had previously instituted a series of rate hikes to bring down high inflation, which was driven up by stronger earlier growth in the resource-rich Australian economy amid high Asian commodity demand.
Stevens said inflation, currently running at 4.5 percent, was likely to remain relatively high in the short term, but that the central bank forecast it would fall back to the target range of 2.0 to 3.0 percent in 2010.
Fuel costs had risen, household spending had been subdued and there were indications of a softening in business activity, with overall economic growth set to be slower, he said.
Prime Minister Kevin Rudd, who has come under fire over the slowing economy, seized on the announcement and told parliament that the government expected high street banks to pass on the cut in policy rates.
"If you pass on interest rates hikes, you have a responsibility also to pass on interest rate cuts," Rudd said, adding this would be the first rate cut ever experienced by some 740,000 first-time home buyers.
But he cautioned that while the interest rate decision was welcome, it was not "a day for celebration."
"Interest rates took a long time to rise and will take a long time, a long time, to come down and the road will be a very uneven one the way through," he said.
"There will be more tough times ahead as we continue to battle economic turbulence abroad and high inflation and interest rates at home."
Australia\’s four biggest banks immediately said they would lower their interest rates in September.
The central bank\’s cut was widely expected after it signalled there was room for less restrictive monetary policy. It is the first cut in interest rates since December 2001.