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RBA rate cut likely to last big move in this cycle-economist

02 Dec 2008 3:13 PM

SYDNEY, Dec 2 AAP - The Reserve Bank of Australia (RBA) has slashed official interest rates to the lowest level in in six and a half years, and more cuts are on the way.

The cash rate was lowered to 4.25 per cent, from 5.25 per cent, for the first time since May 7, 2002.

But economists say the cash rate could fall to under four per cent in 2009, although the next set of reductions were likely to be smaller in size.

The cash rate has not been below 4.25 per cent since the 1960s.

Commonwealth Bank of Australia chief economist Michael Blythe said the RBA was likely to cut by a further 50 basis points in February.

"Policy is now into expansionary territory ... we're at a level the RBA would like to see," he said.

"It's a brave call to say there aren't any more rate cuts out there but you need more negative data to get large, rapid-fire rate cuts."

The RBA's decision on Tuesday marks the fourth month in a row it has cut interest rates in a bid to head off the effects of slower world economic growth on an already soft Australian economy.

It is also only the second 100 basis point rate cut since May 1992 - following a 100 basis point cut in October this year.

The total 300 basis points worth of cuts since September is also the deepest set of rate cuts since early 1990, when the RBA eased monetary policy ahead of a recession.

In a statement on Tuesday, RBA governor Glenn Stevens said financial market sentiment remained fragile amid evidence of weak economic conditions in many major countries, including Australia.

"Commodity prices have fallen further," he said.

"This, combined with the likelihood of below-trend growth in the global economy, suggests that global inflation will moderate significantly in 2009," the RBA said.

The central bank said the federal government's $10.4 billion fiscal stimulus package, due to come into effect next week, and other recent rate cuts would support demand in the year ahead.

Tuesday's reduction was more than had been expected, with most financial market economists looking for a 75 basis point move.

Debt futures markets were more optimistic and had factored in a 100 basis point cut.

RBC Capital Markets senior economist Su-Lin Ong said the the RBA had undone six years worth of rate rises since September.

"They have undone six years (of rates rises) in little over three months," she said.

"They are back to their historic low of 4.25 per cent."

Ms Ong said the RBA was moving in line with other central banks in front loading rate cuts "very aggressively".

"It is very much driven by the deteriorating global growth backdrop and pretty fragile markets," she said.

Further rate cuts are likely, just the sizes would be smaller as the central bank waits for the impact of the various stimuli flowing through the economy, Ms Ong said.

"It is quite clear from the statement that they feel there is a lot of stimulus in the Australian economy that now needs to work its way through the system," she said.

"Not just the monetary side, but the fiscal stimulus, the weaker Australian dollar and petrol as well."

"The door is still open for more cuts, but it is probably likely to be more modest."