The Reserve Bank of Australia (RBA) defied market forecasts with a surprise 75 basis-point cut in interest rates in a move taken by many investors as a dire warning for the overall economy.

The central bank cited increasing evidence that China’s growth engine has begun to sputter in line with the downturn seen in the US and Europe.

Analysts gave warning that the RBA’s move strongly suggests that Australia is heading towards recession: as one Macquarie analyst put it: “A growing number of indicators have fallen off a cliff in October”.

The move meant that rates were slashed to 5.25 per cent, bringing the total cuts by the RBA since September to 200 basis points.

Hastily re-adjusting their numbers after the move, economists now believe that the central bank will bring rates down to 4 per cent by the end of the year.

Glenn Maguire, chief economist at Société Générale, said that the move “sat oddly” with recent comments from within the central bank, suggesting that the previous large cuts had been “front-loaded” and that only a series of trims would subsequently be necessary.

Although stocks rose on the reduction, the RBA said that the outlook was heading for“significant worsening”.

Australia, with its substantial economic exposure to global commodity demand and volatile raw material costs, has suffered a dramatic about-turn in its fortunes as metal prices have plunged on international markets.

Australia’s cut in rates follows central bank moves last week in the US, China, India and Japan. The Bank of England is widely expected to follow later this week.

Glenn Stevens, the RBA Governor, said the darkening global outlook meant it was likely that spending and activity at home would be weaker than previously expected. The Australian Government recently unveiled a hefty economic stimulus package aimed at shoring up confidence in the household sector.

Explore Economics

• Pre-Budget Report 2009

• Budget 2009

• World Economic Forum

• The Times MPC

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive