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RBA cuts interest rates to lowest level in seven years.



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RN PM RBA cuts interest rates to lowest level in seven years

02/12/2008

MARK COLVIN: But first the good news for borrowers in Australia and the bad news that it reflects about the broader economy.

Interest rates are now down to their lowest level in seven years. The Reserve Bank slashed the official rate today by a full percentage point. It made this one of the most aggressive series of rate cuts ever seen.

The central bank says that rates are now at an expansionary level, designed to stimulate the economy and combat the fallout from a global recession.

But there are widespread expectations that there are more cuts to come. Overnight, a recession was declared in the United States and it threatens to be both deep and long.

Economics correspondent Stephen Long.

STEPHEN LONG: What went up has come down, and quickly.

It took years for the official interest rate to rise to its high point in this economic cycle, with the central bank lifting in small increments. Now it's equal to the lowest it's been during the long boom.

And the Reserve Bank has hacked the official rate back to that level with a series of big, fast cuts. One hundred basis points or a full one percentage point, today.

John Edwards, chief economist at HSBC.

JOHN EDWARDS: It's a very substantial cut there's no doubt about it. That means that they've done 300 basis points in a little over 12 weeks; quite remarkable.

STEPHEN LONG: Historic, according to Michael Blythe, chief economist at the Commonwealth Bank.

MICHAEL BLYTHE: Well this is the biggest and most aggressive rate cut cycle we've seen in the low inflation era. In a very short space of time the Reserve Bank has taken out all of that tightening that took up to three years to put in place.

Interest rate levels, 4.25 per cent cash rate is back at the low point that we last saw at the end of 2001.

STEPHEN LONG: Rory Robertson, Macquarie Bank's interest rate strategist says we've never seen the like of it.

RORY ROBERTSON: Now that makes it three percentage points worth of rate cuts in just three months over four board meetings.

So it's the most aggressive policy moves the Reserve Bank's ever delivered, at least in the modern times.

I don't know what it was doing before then but the move by three percentage points in basically three months is extraordinary and it's the Reserve Bank's decisive response to the collapse in the global growth outlook in the wake of the collapse of Lehman Brothers in mid-September that's sparked all this action.

STEPHEN LONG: So how low does it go?

RORY ROBERTSON: To the extent you think the global growth outlook is extremely poor, probably the worst it's been in decades. If you think that the global economy isn't going to bounce back anytime soon, then you can imagine the Reserve Bank cutting further.

So, most economists have the Reserve Bank cutting from 4.25 into the threes and some brave souls are talking into the twos, on the basis that the Reserve Bank will do whatever is required to support the Australian economy, given that the Australian inflation outlook has improved dramatically.

STEPHEN LONG: As it did before this slashing and the last, the Reserve Bank is trying to dampen expectations that the big cuts will be ongoing.

Michael Blythe.

MICHAEL BLYTHE: Well there are certainly some hints there that the era of big rapid rate cuts is coming to an end.

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But it would be a brave call to say that's it. So we probably will see some further more modest rate cuts as we move through the early part of 2009.

We think we'll see another 50 point cut in February. Our financial markets are pricing in the chance of 100 point cut at that particular meeting and a low point of the interest rate cycle of two-and-a-half per cent by mid-2009.

It all depends on how bad the global downturn gets.

Well, I'm sort of drawn to some work the IMF have done on this where they've looked at the impact of financial crises on economic growth. Unfortunately when you have a financial crisis, it does tend to magnify the downturn in the real economy and I think we're in for a pretty difficult year.

STEPHEN LONG: According to the research, recessions that flow from financial crises are deeper and longer and ones sparked by banking failures are the worst of all.

In America, eminent economists from the National Bureau of Economic Research determine when the economy moves in and out of recession.

Last night, the boffins declared that the United States has already been in a recession for a year and few expect it will come out of it before the middle of next, at the earliest.

Not even Ben Bernanke, the chairman of the US Federal Reserve, whose job is everything he wished for and then some.

UNKNOWN QUESTIONER: Mr Chairman when historians write about the period from 2007 to 2009, what do you want to be remembered for having achieved?

BEN BERNANKE: Well, I guess the question is you should be careful what you wish for (laughs).

I was hoping for an interesting tenure at the Federal Reserve.

(Crowd laughs.)

Australia's central bank boss, Glenn Stevens, says he likes it boring. But it may be a long time before he gets his wish.

MARK COLVIN: Stephen Long.

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