RBA cuts rates by 75 basis points

In an effort to stave off the looming threat of a recession, the Reserve Bank slashed 75 basis points off the official interest rate this week. This was higher than the market’s forecasts of 25 to 50 basis points and brings the official cash rate down to 5.25 per cent. Interest rates are now at their lowest level since December 2003 and the RBA’s move signals just how worried RBA Governor Glenn Stevens is about the state of the economy.

The bad news is that the deterioration in Australia’s economic outlook is likely to continue as the fallout from the credit crisis in North America and Europe continues to ripple through. The latest economic figures from the Australian Bureau of Statistics this week were particularly grim.

Retail sales experienced their biggest drop in three years in September and house prices fell by 1.8 per cent for the September quarter. This was the largest quarter-on-quarter drop for Australian capital cities this century. Housing approvals also recorded their biggest fall in more than two years, dropping 7.2 per cent in the third consecutive monthly decline.

Monetary policy has now officially shifted into neutral gear and the next cut is predicted to push policy into stimulatory mode. The market is predicting that the RBA will make another 75 basis point cut in December and some commentators are even predicting that the cash rate will go as low as 4 per cent.

The economy only needs to record two successive quarters of negative growth to officially be in recession. Governor Glenn Stevens and his team have an interesting challenge ahead over the next 12 months to get monetary policy just right. In the short term, they need to quickly stop the economy from slowing and ending up in a prolonged recession. However, they don’t want to provide so much stimulation that inflation becomes an issue again.

Source: InfoChoice.com.au