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Official rate could reach 1960 levels by Easter (Wrap)

24 Nov 2008 2:27 PM
By Stephen Johnson

SYDNEY, Nov 24 AAP - Official interest rates could fall to the lowest levelsince early 1960 by Easter next year, helped by a massive pre-Christmas rate cut by the central bank.

Debt futures markets currently expect the overnight cash interest rate, which is targeted by the Reserve Bank of Australia (RBA) in its monetary policy decisions, to fall to 2.75 per cent by April 2009, from 5.25 per cent at present.

In January 1960, the cash rate was 2.89 per cent, according to the monthly average of official daily data published by the RBA.

And if the commercial banks opt to pass on the reduction in full to their standard variable mortgage rates, monthly home loan repayments could be slashed by 23 per cent by Easter.

Debt futures markets also expect the RBA to cut the cash rate by a massive 125 basis points after its next board meeting on December 2.

That would be the biggest one-month cut in official rate since the onset ofthe 1990 recession.

ABN Amro chief economist Kieran Davies said a shrinking Australian economy,falling asset prices and recession-like levels of business confidence willmake the RBA more inclined to cut rates aggressively.

"The wealth effect of falling asset prices is snowballing and the Chinese economy is slowing very sharply," he said.

"Also, we think the economy is contracting now. We are close to zero."

If the cash rate then fell under three per cent next year, repayments on anaverage250,000 standard variable home loan would fall to $1,380 a month,from1,790, mortgage calculators show.

Commonwealth Bank of Australia senior economist Michael Workman said the global credit crunch had impaired the ability of firms to borrow, which in turn was hampering business investment.

"In terms of corporate access to debt, it's extremely difficult now while it was possible a year ago," he said.

Mr Workman said headline inflation, now at five per cent, would fall early next year as capital city petrol prices fell under1 a litre, and would make the RBA less concerned about price pressures as it slashed rates.

A 125 basis point rate cut in December, as tipped by the markets, would take the cash rate to four per cent.

It would be the biggest cut since April 1990, when the RBA slashed the then16.5 per cent cash rate by 150 basis points as the Australian economy entered into a recession.

Debt futures markets the expect the cash rate to be cut again in February to three per cent.

The cash rate has not been below 4.25 per cent level since the RBA began publishing its cash rate target in 1990.

ANZ economist Riki Polygenis said interest rates were more likely to fall to four per cent in the June quarter of next year, because the RBA had already cut rates by a total of 200 basis points through September, October and November.

"The futures market is getting a little over excited," she said.

"We've already had 200 basis points of cuts and in previous rate cut cyclesthat's all we got in the first year.

"What we're forecasting is still quite aggressive."

ABN Amro and the Commonwealth Bank are forecasting a 75 basis point rate cut in December, and both expect a four per cent cash rate by the end of March.

ANZ expects the RBA to cut rates by a smaller 50 basis points after it meets in December.