RBA Australia : Interest rates fell to a 45-year low of 3.25%

Interest rate cut | rates set for all-time low

March 2, 2009 - 12:25PM

The Reserve Bank of Australia is tipped to cut interest rates to a record-low level in March, as the effects of the global downturn threaten to really hit the domestic economy.

Thirteen of 16 economists surveyed by AAP expect the Reserve Bank of Australia to cut the cash rate when it holds its monthly board meeting tomorrow.

The median forecast was for a 50-basis point rate cut, which would take the cash interest rates to a record low of 2.75% when the RBA announces its decision at 2.30pm tomorrow.

The RBA has already slashed interest rates by 400 basis points - or four percentage points - since September.

Interest rates fell to a 45-year low of 3.25% in February following a 100-basis-point rate cut.

A 50-basis-point cut this week will send the cash rate under the all-time low monthly average rate of 2.89% seen in January 1960.

While domestic business data is still strong, many economists say deteriorating conditions among Australia's key trading partners will weigh on the domestic economy in future months.

More optimistic analysts say the recent run of rate cuts and $52 billion in Federal Government stimulus programs will support local demand.

RBC Capital Markets senior economist Su-Lin Ong said a 50-basis-point rate cut in March was a close call, with the RBA near the end of its easing cycle.

"It's going to be a close decision," she said.

"It's pretty clear from the RBA that they are very reluctant to cut any more, but the reason we think a move is justified is the global downturn has worsened since the last board meeting."

Forecast strategist Mike Katz said the RBA would cut by 50 basis points in March before unemployment levels rose sharply.

"The labour market has held up so far," he said.

"The RBA will want to get rates as stimulatory as possible before that pessimistic data starts to be released."

UBS senior economist George Tharenou said the prospect of a technical recession - measured by two consecutive quarters of negative economic growth - in the first half of 2009 justified the need for a 50-basis-point cut this week.

"We expect the RBA to lean against the deteriorating global backdrop and try to support domestic growth and limit the extent of the downturn," he said.

However, ANZ economist Riki Polygenis said the economy was yet to feel the full effects of the large RBA rate cuts since September and that reinforced the case for a smaller, 25-basis-point rate cut in March.

"We think now the RBA clearly has rates at an expansionary setting," Ms Polygenis said.

"It's a good idea for them to keep some in reserve in case the economy deteriorates more sharply later in the year."

Australian Bureau of Statistics data released last week showed capital expenditure by business surged 6% in the December quarter, a much better result than market forecasts for a 3% decline.

AMP Capital Investors chief economist Shane Oliver, who is also tipping a 25-basis-point cut in March, said while the Australian economy was holding up well, a slowdown in the economies of the nation's key trading partners would prompt the RBA to keep cutting rates.

"On the one hand, domestic demand is stronger than expected ... but the global case has been unrelentingly bad and far worse than the Reserve Bank have been factoring in for their figures, particularly countries we trade with like Japan, South Korea and China," Dr Oliver said.

Japan, one of Australia's biggest trading partners, is experiencing its worst recession in three decades, with a slowdown in the global economy causing its exports to fall by 46% in the year to January.

The Australian government has already announced two fiscal stimulus programs, worth a combined $52 billion, to shield the economy from the effects of a possible recession.

From April, farmers, students and low to middle-income earners are due to receive $900 cheques as part of a $12 billion fiscal allocation from the Rudd government's second $42 billion stimulus package.

RBA governor Glenn Stevens told a parliamentary hearing in Canberra earlier in February that big rate cuts, fiscal stimulus programs and a weaker Australian dollar would help support domestic demand in 2009.

Citigroup managing director of economics Paul Brennan said the remarks indicated rates would be left on hold in March.

"They probably want to keep their powder dry for the bad news in the local economy over the next six months," Mr Brennan said.

Commonwealth Bank chief economist Michael Blythe, who also expects rates to stay on hold in March, said the large rate cuts at the end of 2008 were already working to stimulate consumer spending and the housing market.

"Recent RBA commentary seems to imply they have a desire to take a step back and allow time for what they've done to flow through," he said.

ICAP senior economist Adam Carr said while the RBA was likely to cut rates by 50 basis points in March, there was a good chance rates would be raised again by the end of 2009.

"There's very little justification to hold the cash rate that low for so long," he said.