Australia entered its last recession with the benchmark interest rate at 12 percent. Now, as a once-in-a-century mining-investment boom wanes, the central bank finds itself with little conventional ammunition.
The Reserve Bank of Australia’s overnight cash rate, at a record-low 2.75 percent, is at a level it took the Federal Reserve and Bank of England just months to exhaust before they turned to quantitative easing. While economists see just a 12 percent chance of an Australian contraction by mid-2014, a pronounced downturn would pose unprecedented challenges.
Traders are betting Governor Glenn Stevens will cut rates again to weaken the currency and boost exports. He could emulate global counterparts in stating how long he’ll keep borrowing costs low. In a worst-case scenario, where a financial crunch accompanies a slowdown, economists say any asset purchase program would face a scarcity of government debt, forcing the RBA to mull options including buying foreign bonds.
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