3 October 2001, 10:21 FOCUS - RBA seen cutting interest rates by another 25 basis points by year-end
---- by Robert Fenner ----
SYDNEY (AFX) - The Reserve Bank (RBA) is likely to cut interest
rates by a further 25 basis points before end-2001 given the uncertain
outlook for the global economy with the next move likely to be in
December after the expected federal election in November, economists
said.
This morning the RBA cut the official cash rate by 25 basis points
to 4.5 pct, citing the deterioration in the global economic outlook
since the terrorist attacks in the US on September 11.
Westpac Bank economic general manager Bill Evans said the RBA's
statement accompanying the decision leaves the door open for more rate
cuts and he expects the RBA to do so in December, after the expected
November federal election.
Evans said Westpac had been expecting a 0.5 pct rate cut today, but
noted that the RBA's emphasis on the short term impact of the US
attacks, suggests it is placing less emphasis on the US and global
risks than the Federal Reserve is.
"It is significant that the Bank noted that the attacks will
result in 'further short-term weakness'. The emphasis on the short-term
indicates the RBA is probably placing less emphasis on the US and
global economic risks than the Fed, which has cut by 1 pct, compared to
the RBA's 0.25 pct since September 11," Evans said.
"We expect that over the next month or so there will be sustained
evidence that the current economic weakness will be projected longer
term than currently assessed by the RBA," he said.
That will be through a continuing drag on confidence as uncertainty
persists.
Evans said it was interesting that the RBA said risks associated
with surging house prices have diminished.
"It was concerns with the 'housing bubble' that clearly troubled
the Bank with their decision in September to cut rates," he said.
"The (RBA) also emphasised the positive short-term outlook for the
Australian economy but seems to have brought forward the likely timing
that will see housing activity slow and the weak world economy really
impact Australia's growth profile," Evans said.
"We do not expect a move at the November board meeting. Like today,
it will coincide with the next meeting of the US Federal Reserve.
However, we expect that the likely 0.25 pct cut which will be announced
by the Federal Reserve will be met by silence from our own RBA. That is
because it is likely to coincide with the last week of the election
campaign, when rate moves are highly unlikely," he said.
"A 0.25 pct cut at the December board meeting is now likely and we
cannot dismiss a further 0.25 pct cut in February as it becomes clearer
that Australia's outperformance on growth is not being sustained," he
said.
National Australia Bank head or market economics Tony Pearson said
today's move was not "a finely balanced decision over which the RBA
needed to agonise".
"Today's decision was made in expectation of negative impacts from
global events without any hard evidence to that effect. That evidence
will emerge over the next month or two and is likely to show the
downward hit from recent events has become noticeable," Pearson said.
Although Pearson believes Australia will be one of the better
performing developed economies, the outlook has become "less rosy" in
the wake of recent world events.
"We believe the most likely timing is another 25 basis points on
December 5 following the December meeting of the board and the November
federal election," he said.
Salomon Smith Barney/Citibank economist Annette Beacher said
today's cut was on purely global economic grounds with monetary and
fiscal policy achieving the goal of restoring the housing sector to
pre-GST levels.
Beacher believes the RBA will move again next month as external
factors start to impact on Australia
"Now of course the external sector is something we have very little
control over so the RBA is certainly helping today with the 0.25 pct
cut, and we are expecting another 0.25 next month," Beacher said.
"We are not particularly interested in the timing of the election
because the RBA has publicly stated many times easing or tightening
will go ahead regardless of election cycles."
"4.25 pct is our year-end target," she said.
"Pre-crisis we were looking for a return to neutral policy mid next
year, we've now changed that to year-end next year when policy will be
back at 5.0 pct," she said.
ComSec chief economist Craig James believes another RBA cut before
the end of 2001 is likely with today's cut made from a position of
weakness.
"The small rate cut in Australia is designed to keep the domestic
economy ticking over at the fastest pace possible without compromising
safety," he said.
"The Reserve Bank has plenty of scope to deliver another quarter
percent rate cut by end year," James said.
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