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Australia’s cbank to cut rates by 50 bps next week

* A Reuters’ poll of 20 analysts found all expected the RBA to cut its key 7% cash rate at its monthly policy meeting

SYDNEY: Australia’s central bank is considered almost certain to cut interest rates for a second month at its policy meeting next week, and perhaps by an aggressive half point given the sheer chaos in global markets.

A Reuters’poll of 20 analysts found all expected the Reserve Bank of Australia (RBA) to cut its key 7.0 percent cash rate at its monthly policy meeting on Tuesday.

Indeed, a clear majority of 15 called for an easing of 50 basis points, the first move of that size since April 2001, while only five looked for a 25 basis-point trim.

That was a marked turnaround from just a couple of weeks ago when firm domestic data had many doubting the central bank would ease so soon after September’s quarter point cut.

Since then, the crunch in global credit markets and deepening gloom over the world economy has augured ill for an open economy like Australia that relies heavily on resource exports and foreign finance.

“With weaker global growth and lower commodity prices increasingly the harsh reality, the economy eventually will go into recession if today’s elevated lending rates are not reduced with some urgency,” said Rory Robertson, interest rate strategist at Macquarie.

“My guess is that overseeing a significant reduction in intermediary lending rates is fast becoming the RBA’s policy priority,” he said, predicting rates could fall as low as five percent within the next 18 months.

Part of the need for a larger cut next week was the relentless rise in bank funding costs, with most now reluctant to lend to each other for fear of counterparty failure.

Given this, analysts felt the RBA would have to lower its cash rate by a half point just to get the banks to ease their mortgage rates by a quarter point.

“In these circumstances, we see the RBA as needing to cut more aggressively than we previously expected,” said Alan Oster, chief. “It would require a 50 point adjustment next week for the RBA to have any significant impact on the lending rates that banks set for their customers.”

He saw rates down at 5.5 percent by end of next year, just below the median forecast of 5.75 percent. Likewise, interest rate futures are pricing in 152 basis points of easing in the next 12 months.

But Tony Meer, chief economist at Deutsche, argued that the level of the cash rate was almost irrelevant when banks were reluctant to lend to each other and struggling to access term funding.

“Rather than trying to pre-empt what the banks will do in what is a highly fluid environment, the RBA can cut 25 basis points next week and then observe how much is passed through to ultimate borrowers before calibrating the cash rate in November, and then again in December if required,” he added. reuters

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