Australia may cut interest rate again

Reserve Bank of Australia on Monday greatly reduced the expectations for economic growth and inflation which ups the possibility for further interest rate reduction. It also said that all the measures up till today were not enough to provide buffer to the economy.

The Wall Street Journal reported that the Reserve Bank of Australia in its monetary policy report expects that in the coming few years, there will still be threats from inflation. Policies not only need to address the economic slowdown problem, it will also need to address the inflation problem.

The report says that Reserve Bank of Australia will go for balancing policies to prevent demand from sliding too much and make inflation drop to about 2%-3%.

Reserve Bank of Australia lowered the economic growth forecast for 2008-2009 down to 1.5%. Before this, the August expectation was 2.25%. This was lower then the finance department's expectation of 2% last week and lower than the IMF's expectation of 1.8%.

The report says that the estimated overall inflation for 2009 will drop from end 2008 value of 4.25% to about 3% but will continue to deviate from the Reserve Bank of Australia's target region before 2011.

The report shows that in the coming few months, there is the possibility that the Reserve Bank of Australia will further cut interest rates. But it will not be like the big cut in October and November period. The Reserve Bank of Australia cuts its interest rate in October and November by 100 and 75 basis points.

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11 November 2008

The Straits Times

Nov 11, 2008 | 12:44 PM

Aussie confidence at record low

SYDNEY - AUSTRALIAN business confidence plunged last month to a record low, suggesting the economy may fall into a recession for the first time since 1991, Bloomberg news reported.

The sentiment index slumped 21 points to minus 29 from September, the lowest level since the series began in 1989, according to a National Australia Bank survey of more than 400 companies conducted between Oct 23 and Oct 30.

The threat of a looming global recession is a key reason central bank Governor Glenn Stevens has slashed the benchmark lending rate by 2 percentage points since the start of September to a 3 1/2-year low of 5.25 per cent, the biggest reduction in 17 years, said Bloomberg.

Australia's benchmark S&P/ASX Index of stocks was down 4.2 per cent on Tuesday, extending this year's decline to 38 per cent.

'Fear reigns supreme', said Mr Alan Oster, chief economist at National Australia in Melbourne. 'Continuing volatility in global equity markets, emergency financial packages, falling commodity prices and continuing talk of a global recession have finally broken business optimism'.

The Australian dollar fell to 66.62 US cents at 12.03 pm in Sydney from 66.95 cents just before the report was released.

It has plunged 32 per cent since reaching a 25-year high of 98.49 cents on July 16. The two-year government bond yield dropped 1 basis point to 3.64 per cent. A basis point is 0.01 percentage point.

Bank seizures
Sentiment is also being buffeted by negative company reports. Harvey Norman Holdings, Australia's biggest furniture and electronics retailer, said on Tuesday its like-for-like sales in the 28 days ended Nov 9 fell 2.8 per cent.

Childcare provider ABC Learning Centres and Allco Finance Group were both seized by their banks last week.

Rio Tinto Group, the world's second-largest iron ore exporter, said on Monday it will cut output at its mines in Western Australia by 10 per cent because of reduced demand from steelmakers in China.

Fortescue Metals Group, Australia's third-largest iron ore exporter, will also reduce production.

Most concerning is a drop in forward orders 'to near recessionary levels' among manufacturing and retail companies, Mr Oster said. A gauge of orders fell 10 points in October to minus 20, the lowest since mid-1991, today's report showed.

Hard to borrow
One in four businesses is finding it harder to borrow, according to a new measure of credit availability in Tuesday's National Australia report.

'The greatest credit difficulties were reported by finance, property and business services', and about 35 per cent of companies expect credit to become tighter in the next month, the report said.

Evidence is mounting that consumers and businesses have scrapped spending plans as the global financial turmoil deepens. Qantas Airways, Telstra and Ford Motor are among companies firing workers, according to Bloomberg.

House prices fell 1.8 per cent in the third quarter, the biggest drop since 1978, retail sales tumbled in September by the most in three years, job advertisements slid for a sixth month and home-loan approvals fell for an eighth month, recent reports showed.

The Reserve Bank of Australia on Monday cut its 2008 economic-growth forecast to 1.5 per cent from 2 per cent and said it had been forced to make 'unusually large' reductions in the overnight cash rate target in October and November because renewed global turmoil raised the risk the expansion will stall.

More Cuts
The central bank also signalled it may reduce the rate further to avoid 'an unduly sharp weakening' in demand.