RBA Ready to Cut Rates Again


Australia's central bank signaled it's prepared to add to the most aggressive interest-rate cuts in 17 years as it tries to ensure the economy sidesteps a looming global recession.

The bank today cut its 2008 economic expansion forecast to 1.5 percent from 2 percent and said it had been forced to make ``unusually large'' reductions in the overnight cash rate target in October and November because renewed global turmoil raised the risk growth will stall.

Governor Glenn Stevens has slashed the benchmark lending rate since early September by 200 basis points to 5.25 percent in the most aggressive round of cuts since a recession in 1991. Australia's weakening economy also means underlying inflation is now reaching a peak and will begin to slow in coming months, the bank said today.

Policy makers will cut the benchmark rate by another half point to 4.75 percent on Dec. 2, according to 12 of 19 economists surveyed by Bloomberg News last week. Five expect a quarter-point reduction, one tipped a three-quarter-point cut and one forecasts a 1 percentage point decline.

The bank said falling global demand for commodities, with base metals prices down by an average of more than 30 percent this year, means ``it's clear that Australia's terms of trade have now peaked.''

Gross domestic product will rise 1.75 percent in 2009, less than the 2.5 percent expansion forecast by the bank in its August statement. The bank also said GDP will gain 2.5 percent in 2010, compared to its previous prediction of 2.75 percent.

Australian companies, including builders, are finding it harder to borrow money, the central bank said.

The nation's economy grew 0.3 percent in the second quarter, the slowest pace in more than three years, as households cut spending for the first time since 1993.

Recent reports showed house prices fell 1.8 percent in the third quarter, the biggest drop since 1978, retail sales tumbled in September by the most in three years and job advertisements slid for a sixth month.

Core inflation is likely to remain ``around 4.5 percent'' during the year through December 2008 and then ``decline gradually'' to 3.25 percent by mid-2010 and 2.5 percent by mid 2011, the bank said.

Three months ago, it forecast inflation to slow to 3 percent by the middle of 2010.


TradingEconomics.com, Bloomberg.com
11/10/2008 5:29:56 AM