Page last updated at 06:56 GMT, Tuesday, 7 October 2008 07:56 UK

Australia slashes interest rates

Reserve bank sign
The central bank made the rate cut despite above-target inflation

Australia's central bank has cut its key interest rate from 7% to 6% - a much bigger-than-expected reduction.

The Reserve Bank of Australia said that the sharp cut was justified given the prospects for growth, even though inflation is currently above target.

Prime Minister Kevin Rudd said the move would maintain financial stability and help Australia in "tough times ahead".

The cut, the bank's largest since May 1992, was well received by investors and the stock market rallied.

Observers had only expected the rate to be cut to 6.5%.

'Big step'

The hefty reduction in the cost of borrowing came despite Australian inflation being at 4.5% - well above the government's target of between 2% and 3%.

"They are clearly very concerned about the financial crisis and its potential impact on global growth, on Asian economies which they specifically mention, and on commodity prices," said Saul Eslake, chief economist with ANZ Bank.

"I think it will be seen firstly as contributing to the health of the financial system and a big step to reducing the downside risks to economic growth, provided it isn't interpreted as panic."

Most banks were expected to begin pass on at least some of the rate cut to mortgage holders - with Westpac lowering its variable rate by 80 basis points.

Observers say that the move by Australia adds to pressure on other central banks to reduce rates.

Expectations are now growing that the Bank of England will cut UK rates from their current level of 5% later this week.

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