Interest rates set to fall again in November

As fears of a recession in Australia grow, economists say the Reserve Bank has no choice but to cut interest rates, with markets pricing in an 85% chance of a cut on Melbourne Cup day.

As fears of a recession in Australia grow, economists say the Reserve Bank has no choice but to cut interest rates, with markets pricing in an 85% chance of a cut on Melbourne Cup day.

While the global economic downfall causing havoc on global sharemarkets yesterday, experts claim more rate cuts will be needed to stir confidence.

CommSec economist Craig James says rates can go nowhere but south. “Interest rates are clearly going down,” he says.

“The RBA is focusing more on growth ensuring the economy is going to avoid a recession – the last thing you want is a recession. It takes a long time to recover from them. So the Reserve Bank knows that in this environment inflation is more likely to decrease rather than increase.”

He adds rates are expected to drop by 50 basis points next month with another 50 point cut in the first quarter of 2009 just as likely.

But an academic from the University of Western Sydney has gone further, claiming the RBA will cut rates to zero by 2010, with a 2% rate by the end of next year.

Associate professor of economics Steve Keen believes the Reserve Bank will focus on helping households cope with high levels of debt rather than fighting inflation.

James expects a temporary rise in inflation, but says the global slowdown will see inflation levels drop to the 2% to 3% by 2010.

Figures from the RBA indicate Australian households are savagely cutting back on debt, with the RBA monthly bulletin indicating credit card purchases were down 3% from the same time last year.

Average credit card balances have only increased by an average of $3, the weakest growth in 14 years. Mortgages have also been hit, with the bank’s figures indicating the monthly growth in home loans was 0.4% in August, the lowest level since December 1982.

“People do focus on debt levels in times like these, and is an incentive for the RBA to get [interest rates] back to more stimulatory levels,” James says. “That’s a positive for people who have debt. It’ll make people who have debt payments use the extra money in other areas of the economy.”

But Australian businesses are also reluctant to borrow money, with lending levels slowing to 13.6% in August, the lowest level in three years and down from last year’s 23.8% at the same time.

But James says business borrowing is growing – just at a smaller rate.

“If you have a businesses pulling back in a big way and not spending their money on new infrastructure, yes, that may be a concern, but at the moment we wouldn’t be overly worried about it.”