Rates set to fall sharply again by Christmas

As growing signs of a weakening Australian economy continue to emerge, the Reserve Bank has clearly flagged that more aggressive rate cuts are in store. Deteriorating jobs growth, falling retail sales and rising employment were identified in the RBA’s board minutes as key factors behind the board’s decision to cut rates by a higher than expected 75 basis points this month.

“Members agreed that a further sizeable reduction in official interest rates was appropriate. This would enable a further meaningful reduction in rates paid by borrowers and could assist confidence among consumers and businesses. In addition, given the changing balance of risks, there was an advantage in moving the setting of monetary policy quickly to a neutral position,” the RBA said.

The minutes from the bank’s November 4 board meeting, which were released this week, revealed that the board has become increasingly bearish about the outlook for the Australian economy. They showed that the board did not believe that the federal government’s $10.4 billion fiscal stimulus package, easier credit conditions and a softer Australian dollar were enough to prevent the economy from grinding to a sudden halt.

The official cash rate is now sitting at 5.25 per cent which is its lowest level in five years. Many market commentators are predicting that the RBA will slash rates by another 100 basis points by Christmas. This would bring official rates down to 4.25 per cent.

More economic data is due out over the next two weeks which will show just how close the Australian economy is from tipping into recession. The RBA will be particularly interested in the September quarter private sector capital expenditure figures. These are due out next week and are important to Glenn Stevens and his team because business investment is one of the key drivers behind jobs growth and economic activity. October retail sales figures are also due out the following week. These will show the extent to which consumers are reining in household spending and battening down the hatches for the expected downturn in 2009. The Reserve Bank will next meet on December 2.

Source: InfoChoice