Feb. 3 (Bloomberg) -- Australia’s central bank cut its benchmark interest rate to the lowest level in 45 years and the government announced it will spend a further A$42 billion ($27 billion) to ward off a recession.

Governor Glenn Stevens lowered the overnight cash rate target to 3.25 percent in Sydney today, saving borrowers with an average A$250,000 home loan more than A$120 a month. Treasurer Wayne Swan said the government will spend A$12.7 billion in handouts to families and A$28.8 billion on infrastructure, sending the budget into its first deficit since 2001-2002.

Turmoil on financial markets, the global recession and declining commodity prices “has had a significant dampening effect on confidence,” Stevens said. Incitec Pivot Ltd., Australia’s biggest fertilizer maker, and Alumina Ltd. today cut profit forecasts citing lower prices and weaker demand.

“If the Australian economy still goes into recession with all that stimulus, I don’t know what else policy can do,” said Adam Carr, a senior economist at ICAP Australia Ltd. in Sydney.

Australia’s dollar rose to 63.66 U.S. cents at 5:32 p.m. in Sydney from 63.50 cents just before the bank announced the one-percentage-point rate reduction. The two-year government bond yield gained 7 basis points, or 0.07 percentage point, to 2.50 percent.

The benchmark S&P/ASX 200 stock index rose 0.3 percent to 3,508.7, led by banking stocks. Westpac Banking Corp. today cut the interest rate for its standard variable-rate mortgages by 100 basis points to 5.91 percent.

‘Cushion Economy’

“The combination of expansionary monetary and fiscal policies now in place will help to cushion the Australian economy from the contractionary forces coming from abroad,” Stevens said, adding that policy makers took today’s government spending boost into account.

The economy would have contracted in fiscal 2010 without today’s stimulus, the government said. Swan estimates the extra spending will create 90,000 jobs over two years and help the economy grow 1 percent in the 12 months through June 2009 and 0.75 percent the following year.

The spending will account for 2 percent of gross domestic product this year and 1.3 percent next year.

China’s 10 trillion yuan ($1.46 trillion) package, announced in November, was equivalent to almost one-fifth of the economy in 2008 and Japan’s 10 trillion yen ($111 billion) economic package is 2.5 percent of the economy. The U.S. House of Representatives on Jan. 28 passed a $819 billion stimulus plan, equivalent to 6 percent of the economy.

Global Recession

“The weight of the global recession is now bearing down on the Australian economy,” Swan said. “It would be irresponsible not to act swiftly.”

The trade surplus shrank in December by almost half to A$589 million as exports of coal and metals tumbled 11 percent, a report showed earlier today.

Australia’s economy may already have followed the U.S., U.K., Japan and Europe into its first recession since 1991 after gross domestic product rose just 0.1 percent in the third quarter, the weakest pace in eight years.

GDP in Australia will probably shrink 0.2 percent this year, according to the International Monetary Fund, which last week revised its previous prediction of a 1.8 percent expansion. The IMF said global growth in 2009 will be the weakest in 60 years.

Miners BHP Billiton Ltd. and Rio Tinto Group, retailer Harvey Norman Holdings Ltd. and banks such as Australia & New Zealand Banking Group Ltd. are among companies firing workers as profits decline.

Rising Unemployment

Reports published this year show the jobless rate rose to a two-year high of 4.5 percent in December as companies cut 43,900 full-time jobs, bank lending unexpectedly fell for the first time since 1992, manufacturing shrank in January for an eighth month and house prices dropped for a third straight quarter.

Alumina, partner in the world’s biggest producer of the material used to make aluminum, said today it had an 18 percent decline in second-half profit because of lower prices and higher costs. Incitec Pivot shares plunged to a record low after saying profit will fall.

To offset stalling growth, Stevens and his board lowered borrowing costs in the last four months of 2008 by three percentage points. Today’s one-percentage-point reduction cuts the benchmark rate to the lowest level since February 1964, according to historical figures provided by the Reserve Bank.

Eleven of 20 economists surveyed by Bloomberg News forecast a one-percentage-point reduction and nine tipped a three- quarter-point adjustment.

Global Rates

Still, the nation’s benchmark rate remains among the highest in the developed world, dwarfing the U.S. Federal Reserve’s rate of as low as zero and higher than the European Central Bank’s 2 percent setting.

New Zealand Reserve Bank Governor Alan Bollard cut his benchmark last week to a record-low 3.5 percent and said he has scope for further reductions.

The Bank of England cut its benchmark last month to 1.5 percent, the lowest since the central bank was founded in 1694. The Bank of Japan has reduced its key lending rate close to zero.

Stevens also has the flexibility to cut borrowing costs again in coming months after the inflation rate fell last quarter by the most in 11 years. Consumer prices gained 3.7 percent from a year earlier, cooling from the third quarter’s 5 percent increase.

The Reserve Bank in December said it expects the inflation rate to fall back within its target range of 2 percent to 3 percent this year. Policy makers will publish new forecasts for inflation and growth on Feb. 6.

‘Feel the Heat’

“Our economy has only started to feel the heat over the last three or four months,” John Symond, executive chairman of mortgage broker Aussie Group, said in an interview yesterday. “Unemployment is the danger and that’s spooking consumers. Over the next six months, we’ll probably see an ugly picture.”

Government spending to stimulate the economy, as well as a forecast A$115 billion drop in tax receipts over the fiscal years through June 2012, will result in deficits of A$22.5 billion in the 12 months through June 2009 and A$35.5 billion in 2009-10, Swan said.

Since October, the government has offered almost A$87 billion in aid for families, pensioners, bond markets, home buyers and extra spending on schools and roads.

“The government must be congratulated for getting on the front foot,” said Prasad Patkar, who helps manage $800 million at Platypus Asset Management in Sydney. “Such a proactive approach from governments and central banks is the only hope we have of avoiding Armageddon.”

For Related News and Information: Most-read Australia economy stories: TNI AUECO MOSTREAD BN <GO> Top economic stories: TOP ECO <GO> For stories about the Reserve Bank of Australia NI RBA <GO> Benchmark interest-rate graph: RBATCTR <Index> GP M ROLL <GO> Quarter-on-Quarter Inflation Graph: AUCPICHG <Index> GP <GO>

Last Updated: February 3, 2009 01:47 EST