RBA slashes rates by 1%

The Reserve Bank cut rates this week by 100 basis points in an effort to prop up the stalling economy. This was the fourth cut since the RBA started cutting rates in early September and brings the official cash rate down to 4.25 per cent.

Governor Glenn Stevens said in his statement on monetary policy: "Weighing up the international and domestic developments of recent months, the Board judged that a further significant reduction in the cash rate was warranted now, to take monetary policy to an expansionary setting."

More rate cuts could be on the cards as the Australian economy continues to slow sharply. Data out from the Australian Bureau of Statistics the day after the RBA’s announcement showed that the economy grew at its slowest pace in eight years in the September quarter.

Gross domestic product grew by just 0.1 per cent in the third quarter which is worse than the market expected. Other economic data out this week showed that manufacturing activity fell in November to a six year low. Although policy makers are pinning their hopes on the business sector to help drive growth, companies are continuing to shelve investment plans and cut headcount in an effort to prepare for the uncertain period ahead.

Many economists believe that the economy is already contracting. It only needs to experience two consecutive quarters of negative growth for Australia to officially be in recession. The market has mixed views about how the economy will actually weather the impending slowdown. While the recent economic data doesn’t bode well, some commentators believe that Australia will be able to ride out the global downturn and only experience a slight drop in economic activity.

The federal government’s spending measures for pensioners and low income earners will start to take effect from next Monday and should provide some stimulatory support through December and January. Lower interest rates and fuel prices should also help boost consumer spending.

The question remains whether the interventions from the government and the RBA have been delivered early enough and in large enough doses to stop the economy contracting amidst a global recession.

The RBA Board is set to meet again on 3 February 2009.

Infochoice.com.au