Australia readies for landmark interest rate cut
AUSTR ALI A’S central bank is expected to slash interest rates to historic lows on Tuesday, t he first cut in t hree years amid globa l trade concerns and an underperforming domestic economy.
Australia’s resource-rich economy dodged the worst of the global financial crisis, but rising unemployment, low wages and below-target inflation are stoking fears about the health of the economy Down Under.
Analysts and investors are almost unanimous i n their v iew that the Reser ve Bank of Austra lia will cut rates by 25 basis points to 1.25 per cent when it holds its monthly policy meeting.
“Neither we nor the market think the Bank will stop there,” ANZ analysts told clients on Monday.
“Market pricing has t he cash rate fa lling below one per cent before the end of t his year.”
In t he 10 years since t he globa l meltdown, the Reser ve Bank of Austra lia has – apart from a brief burst of optimism in 2010 – steadily cut rates from a peak of 7.25 per cent.
Any hope of returning rates to more “normal” pre-crisis levels have been quashed by the slow global recovery and domestic headwinds.
A downturn in the country’s hypercharged housing market, falling consumption and stalled wages have already pushed Australia into a per capita recession, with the output per person falling for two consecutive quarters.
The decision to cut rates will take the central bank further into uncharted territory.
Governor Philip Lowe has himself warned that “low-forlong” interest rates could pose problems for financial stability, with banks and other firms overvaluing risky assets.
Already there is talk about the bank going a step further in improving liquidity by buying up securities – so-called quantitative easing.
“Without doubt, the option of QE would be on the radar screen for the RBA,” said Westpac chief economist Bill Evans, who said the bank would look at rates first.
“The transmission mechanism from QE would be more ef fect ive in easing credit conditions and boosting demand.”