---- by Robert Fenner ----
SYDNEY (AFX) - The Reserve Bank of Australia is likely to cut the official cash rate by 25 basis points to 4.25 pct tomorrow in view of a weak global economic environment but with no formal board meeting scheduled for January it could decide on an 'insurance' cut of 50 basis points, economists said.
They said the Australian economy continues to outperform in the face of the global slowdown but its strong export position and booming housing sector may not be sustainable going forward.
Westpac Bank chief economist Bill Evans said the RBA's most recent statement reflected a more pessimistic outlook for the global economy than when rates were last cut in October.
"Looking forward, we expect that this rate cut will be the last for 'global insurance' reasons. Any further rate cuts will need to be justified (by) evidence of genuine weakening in the Australian economic outlook -- in particular housing and employment," Evans said. Evans is expecting a 25 basis point cut, with solid domestic data and an environment of continuing global pessimism insufficient to see the RBA going below 4.25 pct in 2002.
ComSec chief economist Craig James said there are much greater risks in the RBA leaving rates unchanged than if it applies further monetary policy stimulus because the bank does not meet in January and the global economy remains vulnerable.
"We expect the Reserve Bank to cut the cash rate by at least a quarter percent, taking rates to fresh 28-year lows. A half percent rate cut cannot be ruled out, especially given the risk of global fall-out from the Enron collapse," James said.
National Australia Bank economist Tony Pearson said the Australian economy could benefit from further policy stimulus to encourage domestic spending and investment in 2002 when factors such as the housing boom have faded.
Pearson said the size of the rate cut will be a finely balanced decision with "sufficient downside risk to growth from the global environment to warrant a decisive 50 basis point move".
He noted that the RBA has a history of cautious policy making and might not want to make such a large move so close to the end of the easing cycle.
"On balance, we still favour a larger 50 basis point reduction but it will be a close call," he said.
SG Investment Bank economist Glenn Maguire said his firm has no doubt about the strength of the momentum in the Australian economy. "Our key concern is that the pace of economic growth is likely to rapidly lose pace as we move into 2002," he said.
Maguire said the risk of Australia experiencing a quarter of negative growth during 2002 is "significant."
"We continue to view the RBA as easing aggressively for the simple reason that inflation will be falling below target and the bulk of the external shock facing the Australian economy is still in front of us," Maguire said
"Entirely consistent with a significant deterioration in the global outlook, almost non-existent risks to the domestic inflation outlook and the absence of a formal January meeting, the odds still favor a 50 basis point rate cut from the Reserve Bank," he said.
Salomon Smith Barney economist Paul Brannan said there are signs the global downturn is catching up with parts of the Australian economy, especially in export volumes and services, which should pull growth back to a more moderate pace during the December quarter. Brannan is forecasting a 25 basis point rate cut in December, ANZ Bank economist Karen Pringle said the risk of further international weakness remains the primary concern for the RBA despite current domestic strength.
"Clearly the RBA is looking forward and sees Australian growth slowing in 2002 in a lagged response to the global weakness. The RBA also remains very comfortable with the medium-term inflation outlook," Pringle said.
"This suggests the RBA still has a bias to ease further. However, given the ongoing strength in the housing sector, future rate cuts may well require evidence that the global slowdown is visibly affecting exports and tourism or that domestic corporate collapses have affected confidence and employment and spending in a substantial way. "Given our own expectation that economic data over the next several months (both in the US and in Australia) will be weak, we expect the RBA to ease once more. We therefore retain our target for the low in the cash rate of 4.25 pct," she said.