Mon, Oct 06, 2008 page11

• Australia expected to cut interest rate

  AMID HIGHER RISKS Leading economists argue that a cut of 50 basis points from the current 7 percent rate is likely, which would be the biggest cut since April 2001

  • AFP
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  Australia’s central bank is expected to cut interest rates by up to 50 basis points because of the global financial crisis when its board meets tomorrow, economists said.

  The credit crunch will likely prompt the Reserve Bank of Australia (RBA) to lower its official cash rate to 6.50 percent as fears about a global slowdown outweigh concerns about domestic inflation, they said.

  All 19 economists surveyed by national news agency AAP said they expected the RBA to cut its official cash rate when its board gathers for its monthly meeting tomorrow.

  Eleven of those questioned said they expected the bank to wipe 50 basis points from the current rate of 7 percent in what would be the biggest rate cut since April 2001. The RBA last month cut its rate by 25 basis points.

  “With the higher risk of a sharper global slowdown now apparent and higher short-term cost for bank funding we expect the RBA to be more aggressive,” National Australia Bank Group chief economist Alan Oster said.

  Even with the passage of Washington’s US$700 billion bailout of Wall Street, tighter credit conditions meant that the RBA was likely to follow up a cut this month with another before the end of the year, he said.

  “While much depends on avoiding further global contagion in coming months we see the risks to both growth and interest rates as being to the downside,” he said, adding that the cash rate was likely to drop to 5.5 percent by April.

  Economists from the Australia and New Zealand Banking Group said financial conditions in Australia were now too tight and a 25 basis point cut from the RBA would not be enough to relieve pressures.

  “In our view, a 25 basis point interest rate cut from the RBA next Tuesday would simply be enough to return financial conditions to the level that persisted before the current crisis,” they said in a market note.

  “The significant downside risks now facing the global economy — and the risks that poses to Australia — suggest that such a tight setting of local monetary policy is no longer appropriate,” the note said.

  Shane Oliver, chief economist at AMP Capital Investors, said the global credit crunch had become more ferocious than ever following the failure of Lehman Brothers investment bank in the US and a deteriorating global growth outlook.

  He said the RBA was likely to cut rates by 50 basis points because of the growing threat to the Australian economy from the global economic slump and the ongoing contraction in global credit availability.

  Meanwhile, the fact that commercial banks were unlikely to pass on the full amount of a rate cut, given the latest blow-out in their funding costs, meant the RBA was less likely to shave just 25 basis points from the rate, he said.

  When the RBA cut rates last month, the first lowering of its rate in almost seven years, the country’s five biggest banks followed its lead.

  Australian Treasurer Wayne Swan said banks’ borrowing costs were now substantially higher as a result of the credit crunch and the government would not pressure retail banks to pass on to mortgage-holders the full amount of any rate cut.

  “We’ve just been through the biggest upheaval in financial markets in over 70 years,” Swan told Network Ten yesterday.

  “The consequence of that is that funding costs have increased substantially and that does impact on the capacity of our banks to lend,” he said.

  But Swan said he expected retail banks to pass on the maximum amount possible to mortgage-holders.
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