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(CEP News)- The Reserve Bank of Australia is expected to slash its target rate again next week as the Australian economy enters the worst phase yet of its downturn. The RBA has already cut rates by 300 basis points since September 2008.
"The economy has been hit by slowing demand for its resource exports and a massive reversal of terms of trade due to lower commodity prices," said Tehmina Khan, economist with Capital Economics. "We, along with the consensus of analysts, think that a larger cut is in store." Earlier this week, economists were expecting a 75 basis point cut, but following the sharper-than-expected 150 basis point cut from the Reserve Bank of New Zealand on Jan. 29, the consensus moved to a 100 basis point cut to 3.25%. "The 150 bp rate cut from the RBNZ shows that there is still a role for large stimulatory policy decisions and Governor Bollard's very dovish assessment of the New Zealand economy should be echoed by the RBA Governor on Tuesday," said Joshua Williamson, economist with TD Securities. The economic information coming out of Australia in recent weeks certainly makes the case for a steep rate cut. On Friday, a report showed money lending to businesses and consumers declined for the first time since 1991 in December. Crucially, last week's fourth quarter inflation report revealed price pressures are levelling off in Australia, allowing room for the central bank to cut rates. The annual trimmed mean rate came in at 4.2% - this is still above the RBA's 2-3% target range but economists agree it will fall further. Williamson said the accompanying statement from the RBA will probably convey that inflation concerns are being placed on the back burner. Meanwhile, Australian growth looks set to drop off in the fourth quarter, after third quarter GDP printed anemic 0.1% quarterly growth. As for market reaction, Tony Morris, senior rates strategist at ANZ Bank, said heightened expectations of rate cuts are seeing short-term bond yields continue to fall, but longer-dated bonds are falling behind in the move, "highlighting the theme of continued yield curve steepening," he said. "A more aggressive stance from the RBA might see more of a rally in term-rates in the near-term, but we remain cautious on how far this can go with 2.0% cash rates by the middle of the year almost fully factored into current market pricing," he said. In currency markets, Amber Rabinov, economist with ANZ, said a smaller, 75 basis point cut - which is still expected by many economists - could see the Aussie dollar push higher, particularly against the New Zealand dollar and the pound. By Megan Ainscow,
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