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Australia's central bank cut its benchmark interest rate by one percentage point, the biggest reduction since a recession in 1992, to cushion the nation's economy against fallout from a global credit freeze.

Stocks rose after Governor Glenn Stevens and his board lowered the overnight cash rate target to 6 percent from 7 percent in Sydney today. “An unusually large movement in the cash rate was appropriate in order to bring about a significant reduction in costs to borrowers,'' Stevens said.

Turmoil on financial markets combined with a drop in consumer spending and home borrowing has prompted Stevens to reduce the benchmark rate and buttress an economy that grew at the slowest pace in more than three years in the second quarter. The global credit-market squeeze has also driven up the cost of funding, suggesting lenders may not pass on all of today's reduction to borrowers.

“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 could be significantly weaker than earlier forecast.'' Stevens said in a statement.

Australia's S&P/ASX 200 Index of stocks added 1 percent to 4,584.8 at 2:47 p.m. in Sydney, reversing a drop of 0.5 percent immediately before the Reserve Bank of Australia's decision. The index has lost almost a third of its value this year amid a credit freeze triggered by the U.S. subprime mortgage crisis.

Currency Moves

The Australian dollar initially fell before rising to 72.29 U.S. cents at 2:52 p.m. in Sydney from 72.06 cents before the decision was announced. The currency has tumbled 28 percent since hitting a 25-year high of 98.49 cents on July 16.

The bank's cut today came after stocks tumbled around the world, the euro fell the most against the yen since its debut and oil dropped below $90 a barrel as concerns about a global slowdown overshadowed the $700 billion U.S. Treasury plan to revive credit markets.

The Reserve Bank cut the benchmark interest rate by a quarter point a month ago after pushing borrowing costs to a 12- year high with a dozen similar increases between May 2002 and March this year.

Concern that domestic demand “could weaken more sharply than necessary'' was a key reason Stevens reduced the rate on Sept (fast cash). 2, even after inflation accelerated above his target range of between 2 percent and 3 percent.

Economic Growth

Households cut spending in the three months through June this year for the first time since 1993, causing quarterly gross domestic product to expand just 0.3 percent, the slowest pace since the fourth quarter of 2004.

Home-buyers have also become less willing to borrow after companies such as Qantas Airways Ltd. and Ford Motor Co. announced job cuts. Banks have taken “a more cautious attitude to lending'' and tripled provisions for bad debts, according to a Reserve Bank report last month.

Credit provided by banks and financial institutions to home buyers rose 0.4 percent in August, the smallest monthly increase in 22 years, and house-building approvals fell for a second month.

A Westpac Banking Corp. gauge of consumer confidence showed pessimists outnumbered optimists in September for an eighth month. August business sentiment was close to a seven-year low.

Speculation that Stevens would cut the benchmark rate by a half point surged last week after the global credit squeeze drove up the cost of funding for banks and hampered their ability to pass on official rate reductions in full.

Home Loans

A percentage point reduction in mortgage rates would reduce the repayments on an average A$250,000 ($181,000) home loan by almost A$200 a month, according to the Real Estate Institute.

“The recent evolution of the credit crisis presents a serious threat to the Australian economy,'' Brian Redican, a senior economist at Macquarie Group Ltd. in Sydney, said ahead of today's decision. “The Reserve Bank's easing cycle is likely to step up a gear.''

Waning consumer spending and confidence is being partially offset by a China-driven mining boom. Soaring coal and iron ore exports helped generate a trade surplus in August of A$1.36 billion, the second-largest windfall on record.

Inflation accelerated to 4.5 percent in the second quarter and is forecast by the central bank to peak at 5 percent later this year before slowing back within the bank's target range in 2010.

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