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Big rate cut tipped.



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2CN AM Big rate cut tipped

02/12/2008

TONY EASTLEY: One of the big drivers of the world economy, the US, is in recession, and today we get a further indication of the state of Australia's economy when the Reserve Bank board meets to decide the direction of interest rates.

And this morning market analysts embark on a favourite guessing game: just how big will the interest rate cut be?

I'm joined in the studio now by our business editor Peter Ryan, good morning Peter.

With new evidence of an accelerating economic slowdown in Australia, what can we expect from the Reserve?

PETER RYAN: Well, Tony, with US manufacturing now at a 26-year low, Australian manufacturing is in its worst shape since 1992, and I've noted that crude oil down to below $US50 a barrel overnight, there's plenty for the Reserve Bank to consider when they meet in Melbourne.

With evidence of a deep economic slowdown underway, expectations are growing that that RBA will cut beyond the anticipated 75 basis points.

And the RBA is likely to provide a shot of adrenalin to the economy with a full one percentage point cut, perhaps even 125 basis points, to shield Australia from the fallout in the United States.

TONY EASTLEY: Finally, we're seeing signs that the threat of inflation is starting to fade. Does that make deeper rate cuts even more likely and back up what you're saying?

PETER RYAN: Yes, well we saw this from an unofficial gauge from TD Securities and the Melbourne Institute shows yesterday that inflation fell quite dramatically in November and the annual rate back within the target band. This is because of falling petrol prices, and fewer people taking holidays.

Not so long ago, inflation was the key threat for central bankers, now it's definitely on the backburner. And that gives the RBA more freedom to cut deeply, and some economists think the official rate could fall to 2.5 per cent by the middle of next year.

TONY EASTLEY: Business editor Peter Ryan.

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