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(CEP News) - Economists have served up an assortment of forecasts for the Reserve Bank of Australia's (RBA) rate decision tomorrow, ranging from a 25 to 100 basis point cut. The bank has cut rates by 175 basis points in the last two months, embarking on a vicious rate-cutting cycle that surprised economists twice over.
"There are good arguments for both a smaller or larger move," said Riki Polygenis, economist at ANZ. Bloomberg's consensus forecast predicts a 75 basis point cut to 4.50% tomorrow. The RBA's own rhetoric seems to indicate cuts won't be as sharp as markets expect, Polygenis said. RBA Governor Glenn Stevens warned Australians against talking themselves into a recession last week, and highlighted the fundamental strength of the Australian economy. Furthermore, Polygenis said, the 200 basis points in cuts over the last three months may have satisfied the bank's desire to bring rates into "neutral" territory, allowing the RBA to take a more gradual approach. Nevertheless, he said, there is no monetary policy meeting in January, and with the threat of a recession weighing on the Australian economy, the RBA may move to cut rates sharply again. Joshua Williamson, economist with TD Securities has no doubt the RBA will cut by 100 basis points, or even more, "despite last week's speech by the RBA governor," he said. Williamson said inflation is falling within the RBA's target range, allowing the board members room to cut rates sharply. Falling petrol prices are feeding through and causing a broad-based decline in prices, he said. TD Securities' inflation expectation, released today, predicted a 3.0% annual inflation rate for November, sliding just within the RBA's 2-3% target range. Williamson's forecast is in-line with the market, which is fully priced in for a full percentage point cut and 36% priced in for a 125 basis point cut. Bill Evans, economist at Westpac said market expectations are "way too ambitious" and the argument that a sharp cut will be made to cover for no meeting in January is naïve. He said while news out of the United States continues to be dismal, Australia's domestic economy doesn't look so bad. Jobs are still growing and consumer sentiment recently posted an increase, he said. Evans is calling for a 75 basis point cut at the meeting tomorrow. Carl Weinberg, economist with High Frequency Economics said the rate decision will probably rest on the gross domestic product result for the third quarter. Bank board members will get to see the GDP result at the meeting before the figure is publicly released on Wednesday. Weinberg said if GDP contracts, a 75 to 100 basis point cut is likely, whereas if it reveals growth, a gentler 25 or 50 basis point cut is probable. If the RBA cuts less than expected, currency markets could see a boost in the Australian dollar, said economists at Barclays Capital. On the other hand, they said, focus on falling equity markets and weak domestic data will probably outweigh the RBA decision, and limit any upward movement in the Aussie. By Megan Ainscow,
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