One Cut Down, Three To Go

The Age

Wednesday September 3, 2008

Vanessa O'Shaughnessy, Investment Reporter

INVESTORS are predicting a series of interest rate cuts after the Reserve Bank did an about-turn, reducing its official cash rate for the first time in almost seven years.

The cut precipitated a dramatic fall in the Australian dollar last night.

The market believes this trickle over the interest rate weir will turn into a torrent and investors are pricing in at least three additional interest rate cuts in the next year.

They expect the RBA to move again in October, doubling up on yesterday's 25 basis point cut that took official interest rates from 7.25% to 7%.

Last night, the dollar plunged to US83.09, reversing its earlier rally as currency experts pondered future RBA moves.

ABN Amro foreign exchange strategy director Greg Gibbs said the Aussie had come a long way from its highs, despite the continuing resource boom.

But the US dollar continued to gain against most currencies, including the euro, the pound and the relatively high-yielding Australian dollar.

Yesterday, RBA governor Glenn Stevens' neutral commentary did little to alter market expectations, even though there was no guarantee of further rate cuts in the even-handed assessment of Australia's economic status.

"Given the opposing forces at work, considerable uncertainty has surrounded the outlook for demand and inflation," he wrote.

"On balance, however, it is looking more likely that household demand will remain subdued and overall economic growth slow over the period ahead."

Building approvals fell by 2.3% in July, a much bigger fall than the 0.5% predicted by economists.

St George economist Marie Tasevski said building approvals were at their weakest in 12 months, having plunged 13.1% from the peak of November last year.

"High interest rates and low housing affordability are continuing to overwhelm favourable underlying housing fundamentals that include low vacancy rates, high immigration, strong population growth and rising rental yields," she said.

Similarly, today's gross domestic product data is expected to show the Australian economy slowed between April and June.

ANZ economists predict growth of 0.4% in the quarter, a result that would lower the yearly growth rate to 2.9% for 2007-08.

In contrast, Australia's terms of trade have improved, as the price charged for exports increased relative to the price of imports.

Australian businesses continue to invest, and headline inflation is running at 4.5%, well above the RBA's comfort zone of 2-3%.

Even so, the market is pricing in an 80% chance of a rate cut at the RBA's October meeting, according to Credit Suisse. Within a year, investors expect the central bank to have cut rates by 85 basis points.

But Credit Suisse Global Money Markets director of fixed income Bradley Harper said the market was unsure as to the timing of further interest rate cuts.

There were some expectations that the RBA would move again in November or December.

Australian Government 10-year bonds are offering a yield of 5.7%, well below the current cash rate. And the yield on two-year bonds fell to 5.68% yesterday.

© 2008 The Age

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