02/12/2008 - 13:23

Investors give thumbs down to rate cut

02/12/2008 - 13:23

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Investors have reacted negatively to the Reserve Bank's 100 basis point rate cut, with a benchmark index taking a hit shortly after the rate reduction was announced.

Investors have reacted negatively to the Reserve Bank's 100 basis point rate cut, with a benchmark index taking a hit shortly after the rate reduction was announced.

Prior to the RBA announcement, the All Ordinaries index was at 3549.8 points but then dipped sharply to 3522.4 points in four minutes after the rate cut.

The RBA lowered rates by 100 basis points to 4.25 per cent in a bid to ward off the impact of slower world economic growth on an already soft Australian economy.

At 15:22 AEDT, the All Ordinaries was trading at 3503.4 points.

The 100 basis point rate cut was broadly in line with market expectations, with analysts previously forecasting a rate cut of between 75bps to 125bps.

Economists are tipping further rate cuts next year, however the size of the reduction is likely to be less aggressive compared to the last four rate cuts.

The official cash rate has not ventured below 4.25 per cent since the 1960s.

Commonwealth Bank of Australia chief economist Michael Blythe said the RBA was likely to cut by a further 50 basis points in February.

"Policy is now into expansionary territory ... we're at a level the RBA would like to see," he said.

"It's a brave call to say there aren't any more rate cuts out there but you need more negative data to get large, rapid-fire rate cuts."

The total 300 basis points worth of cuts since September is the deepest set of rate cuts since early 1990, when the RBA eased monetary policy ahead of a recession.

RBC Capital Markets senior economist Su-Lin Ong said the the RBA had undone six years worth of rate rises since September.

"They have undone six years (of rates rises) in little over three months," she said.

"They are back to their historic low of 4.25 per cent."

Ms Ong said the RBA was moving in line with other central banks in front loading rate cuts "very aggressively".

"It is very much driven by the deteriorating global growth backdrop and pretty fragile markets," she said.

Further rate cuts are likely, just the sizes would be smaller as the central bank waits for the impact of the various stimuli flowing through the economy, Ms Ong said.

"It is quite clear from the statement that they feel there is a lot of stimulus in the Australian economy that now needs to work its way through the system," she said.

"Not just the monetary side, but the fiscal stimulus, the weaker Australian dollar and petrol as well."

"The door is still open for more cuts, but it is probably likely to be more modest."

 

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