04/11/2008 - 14:48

Economists tip another rate cut

04/11/2008 - 14:48

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CommSec is tipping a further interest rate cut of 25 basis points next month as the central bank today slashed rates by a bigger than expected 75 basis points, a move welcomed by various lobby groups across the country.

Economists tip another rate cut

CommSec is tipping a further interest rate cut of 25 basis points next month as the central bank today slashed rates by a bigger than expected 75 basis points, a move welcomed by various lobby groups across the country.

CommSec's chief equities economist Craig James said today's rate cut, the Reserve Bank of Australia's third in a row, is the "most aggressive" rate cut cycle in percentage terms in 25 years.

The latest RBA cut lowers the official cash rate to 5.25 per cent, the lowest level since March 2005.

"Given the gloom abroad, clearly the Reserve Bank needs to do everything possible to shore up our defences," Mr James said.

"And the Reserve Bank is certainly not shirking from its responsibilities, engaging in the most aggressive rate cut cycle in 25 years.

"You have to go back to around the time the Australian dollar was floated in December 1983 to find a more dramatic reduction in interest rates."

RBA governor Glenn Stevens said in an accompanying statement that while the federal government's $10.4 billion fiscal stimulus package would help support the economy, a slowing global economy would have a dampening effect.

"Recent reductions in borrowing rates, the depreciation of the exchange rate and the fiscal stimulus announced in October will work to assist growth in the period ahead, but deteriorating international conditions and falling commodity prices will have a dampening influence," the RBA said.

"On balance, it appears likely that spending and activity will be weaker than earlier expected."

The central bank also expressed concern about a slowing Chinese economy.

"International economic data have continued to point to significant weakness in the major industrial economies, and there have been further signs that China and other parts of the developing world are slowing as well," the RBA said.

"These conditions have contributed to further falls in world commodity prices."

On the business front, Mr James said if businesses don't over-react by cutting staff and some sort of normality returns to the share market, Australia can successfully avoid being dragged down by the gloom abroad.

However, while the rate cut is welcome, Mr James believes the RBA can go one better.

"A more normal or 'neutral' level for the cash rate is around 5 per cent," Mr James said.

"CommSec believes that the Reserve Bank will reduce the cash rate to 5 per cent in December then sit back and determine the impact of rate stimulus on the economy."

Meanwhile, Real Estate Institute of Western Australia president Rob Druitt said while he welcomed the RBA rate cut decision, there was still a way to go before the housing market picks up.

He told WA Business News that a further cut of 50bps was needed, along with banks to pass on the cuts, for a positive impact to be felt.

He added that the variable rate needed to be 7 per cent or lower to stimulate the middle and top end of the market, which has been most affected by the housing downturn.

The Australian Chamber of Commerce and Industry said the rate reduction would provide much needed relief by easing borrowing costs and boosting consumer confidence.

"Given that general business conditions and the business economic outlook is at a 14-year low, we consider that a less restrictive monetary policy, combined with the first tranche of the government's stimulus package, is critical to avoid a major domestic economic slowdown," the chamber said in a statement.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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