Lower My Rate

SYDNEY (AFP) - Australia’s central bank is expected to cut interest rates by up to 50 basis points due to the global financial crisis when its board meets Tuesday, economists said.

The credit crunch will likely prompt the Reserve Bank of Australia (RBA) to lower its official cash rate to 6.50 percent as fears about a global slowdown outweigh concerns about domestic inflation, they said.

All 19 economists surveyed by national news agency AAP said they expected the RBA to cut its official cash rate when its board gathers for its monthly meeting on October 7.

Eleven of those questioned said they expected the bank to wipe 50 basis points from the current rate of 7.0 percent in what would be the biggest rate cut since April 2001. The RBA last month cut its rate by 25 basis points.

“With the higher risk of a sharper global slowdown now apparent and higher short-term cost for bank funding we expect the RBA to be more aggressive,” National Australia Bank Group chief economist Alan Oster said.

Even with the passage of Washington’s 700 billion US dollar bailout of Wall Street, tighter credit conditions meant that the RBA was likely to follow up an October cut with another before the end of the year, he added.

“While much depends on avoiding further global contagion in coming months we see the risks to both growth and interest rates as being to the downside,” he said, adding that the cash rate was likely to drop to 5.5 percent by April.

Economists from the Australia and New Zealand Banking Group (ANZ) said financial conditions in Australia were now too tight and a 25 basis point cut from the RBA would not be enough to relieve pressures.

“In our view, a 25 basis point interest rate cut from the RBA next Tuesday would simply be enough to return financial conditions to the level that persisted before the current crisis,” they said in a market note.

“The significant downside risks now facing the global economy — and the risks that poses to Australia — suggest that such a tight setting of local monetary policy is no longer appropriate.”

Shane Oliver, chief economist at AMP Capital Investors, said the global credit crunch had become more ferocious than ever following the failure of Lehman Brothers investment bank in the US and a deteriorating global growth outlook.

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