RBA tipped to cut rate rates again next Tuesday

The Reserve Bank is set to cut the official cash rate again when it meets on Melbourne Cup day next Tuesday. The big question is by how much.

There’s no doubt that the case for a large cut is continuing to build. According to a quarterly survey of business conditions by a major bank during the week, conditions deteriorated even further during the September quarter.

The survey recorded its lowest level since early 2001 and is one of the biggest quarterly drops in the past 20 years. With weak forward orders and lower investment and employment expectations, the survey showed that conditions in the economy are likely to become very grim in 2009.

A higher than expected consumer price index report and the fiscal stimulus from the Government’s $10.4 billion spending plan are unlikely to stop the RBA from making at least some kind of cut in the official cash rate.

Economists are still debating the size of the cut, whether it will be 50 basis points or only 25. In the minutes to the RBA’s October board meeting explaining the board’s decision to slash rates by 1 per cent, Governor Glenn Stevens stressed that “members did not regard this unusually large adjustment as establishing a pattern for future monetary policy decisions.”

This means that the RBA is trying to manage the market’s expectations about the size of future cuts. The RBA decided to lower the cash rate by 100 basis points from 7 to 6 per cent early last month. A 50 basis point cut next week would bring the official rate down to 5.5 per cent.

This size cut would follow moves by the US central bank. The US Federal Reserve cut the key fed funds rate by 50 basis points to just 1 per cent on Wednesday. The US Government and other global policy makers are doing everything they can to stop their economies from falling into recession. Central Banks in the UK and Japan are expected to cut their official cash rates in the next few weeks.

Infochoice.com.au