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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