More rate cuts coming, but emergency cut unlikely

By Stuart Fagg, ninemsn Money with AAP, December 16, 2008

The Reserve Bank of Australia (RBA) will continue to cut interest rates, but an emergency cut in January has been all but ruled out.

The minutes of the RBA's meeting earlier this month, released today, showed that the bank's board (which decides on changes to interest rates) delivered a 1 percent cut to avoid having to take action in January, a month where the bank does not traditionally meet.

The minutes showed the RBA was concerned that an emergency cut in January could spook markets.

"Members also took account of the fact that a board meeting was not typically scheduled in January, given that the local markets tended to be relatively thin over the summer break and statistical and survey data, as well as liaison information, were less timely.

"Overall, members judged that the two-month break between meetings was one consideration in favour of a substantial reduction in interest rates at this meeting."

Last week, RBA governor Glenn Stevens did not rule out the possibility the central bank would not alter rates in January, although traditionally no meeting is held in the month.

"I will not be at the office, but I won't be far from the office," Mr Stevens said at the Australian Business Economists annual dinner in Sydney.

Despite the speculation of a January cut, economists said it remains an unlikely scenario. "Clearly, the RBA wants the summer off," said Warren Hogan, head of Australian ecnomics and interest rate research at ANZ. "In response the money markets have reduced the probability of a January rate cut from 24 basis points to 15 basis points although a 100 basis points rate cut [cumulative] is still priced by the February meeting."

Rates are tipped to be slashed again in February with the shortest odds pointing to a 50-75 basis point cut in official rates, according to online wagering provider Centrebet.

Economists are also tipping further cuts in official rates, with one leading economist calling for the cash rate to fall as low as 2.75 percent by mid 2009.

Bill Evans, chief economist at Westpac, said that with the world economy “deeply in recession”, and a high chance that US interest rates will be cut to zero, more Reserve Bank rate cuts are inevitable.

“Our forecast has been for rates to bottom out at 3.5 percent in March. That would have entailed a 50bp cut in February followed by a final 25bp cut in March,” Evans said last week. “That profile now looks too conservative. With the US cash rate now likely to eventually go to zero such a low point [2.75 percent] for Australia’s rates seems eminently sensible.”

The RBA minutes also revealed that the central bank expects unemployment to rise. "Indicators of future growth in employment were weakening more sharply; the number of jobs advertised on the internet and in newspapers was falling and business surveys indicated lower hiring intentions," the minutes read. "Members acknowledged that these data suggested unemployment was likely to rise in the period ahead."