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Australia, facing its first recession in two decades, has more scope to cut interest rates and boost spending than other countries, said central bank Assistant Governor Malcolm Edey.

“Australia is fortunate to have come into this period in better shape than most, with sound financial institutions, and with more scope than most for macroeconomic policies to respond as needed,” Edey said in a speech in Sydney today.

Edey also said Australia won’t “avoid some further weakness,” after the economy unexpectedly shrank in the fourth quarter for the first time in eight years. The central bank signaled earlier this week it may resume cutting the benchmark interest rate, now at a 45-year low of 3.25 percent, as the global recession saps demand for exports.

Future cuts “will be more incremental from here, given how stimulatory policy is,” said David de Garis, a senior economist at National Australia Bank Ltd. in Sydney. “As recovery emerges, rates will also be pushed back up quickly again to more normal levels.”

The Australian dollar fell to 67.39 U.S. cents at 12:46 p.m. in Sydney from 67.73 cents just before the speech was released. The two-year government bond yield dropped 16 basis points to 2.54 percent. A basis point is 0.01 percentage point.

Central bank policy makers led by Governor Glenn Stevens left the overnight cash rate target unchanged on March 3 for the first meeting in six, saying the move “would leave adequate flexibility for policy at future meetings,” according to minutes of their decision released earlier this week.

Global Rates

By contrast, the benchmark rates in the U.S. and Japan are close to zero, and the U.K.’s is 0.5 percent, the lowest since 1694.

There are signs that “world economic conditions have remained very weak in the early part of 2009,” Edey said today. “In this environment, it’s not going to be possible for Australia to avoid some further weakness.”

Recent reports suggest the economy is close to its first recession since 1991 as the global recession saps demand for exports from Australia, the world’s biggest shipper of iron ore and coal.

Gross domestic product unexpectedly shrank 0.5 percent in the fourth quarter from the previous three months, the first decline since 2000.

The jobless rate jumped to 5.2 percent last month, the highest rate in four years, as companies such as clothing manufacturer Pacific Brands Ltd. and miner BHP Billiton Ltd. fired the largest number of full-time workers in almost two decades.

Housing Slumps

The number of housing starts slumped 9 payday loan companies.9 percent in the December quarter from the previous three months, the biggest drop in more than eight years, and the total value of credit card transactions fell 21 percent in January, reports showed today.

The International Monetary Fund will probably revise its January forecast for global growth of 0.5 percent in 2009 to “show a contraction in world gross domestic product this year,” Edey said.

To offset the impact of a deepening global recession, Australia has joined other countries including the U.S., U.K., Germany and China in boosting government spending to stoke domestic demand.

Australia’s government said last month it will spend A$42 billion ($28 billion) on cash handouts to families and on infrastructure.

“In total, discretionary fiscal measures announced since late last year will provide a stimulus of close to 2 percent of world GDP in 2009,” Edey said.

Bank Support

Governments have also responded to the crisis through a variety of mechanisms, including direct capital injections, asset purchases and the provisions of bank guarantees, the assistant governor said.

“More still needs to be done, but one encouraging sign is that banks have been able to make good use of their capacity to issue guaranteed bonds, and this is helping to alleviate uncertainty about the availability of longer-term funding,” Edey said.

Australian banks raised about $75 billion under government pledges introduced in the second half of last year, lagging behind only the U.S. and U.K.’s financial institutions, Westpac Banking Corp. said in a March 16 note.

The Federal Reserve said yesterday in Washington that it will buy as much as $300 billion of Treasuries and step up purchases of mortgage bonds.

Global Regulation

Global growth is expected to resume next year “as the various policy measures that are being put in place gradually take hold,” Edey said.

To prevent a repeat of the credit squeeze that led to the collapse of Lehman Brothers Holdings Ltd. in September, triggering a slump in global household and business confidence, regulators will need to develop new systems that are “adaptable to changing circumstances, Edey said.

“It’s in the nature of markets that they will tend to innovate around regulations, and in any case, the nature of risk-taking is going to keep changing as financial systems get more sophisticated,” he said.

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