Australia’s central bank is considered almost certain to cut interest rates next week, bringing the easing since September to a bold 175 basis points as it seeks to cushion the economy from a global downturn. All 19 analysts in a Reuters poll expected the Reserve Bank of Australia (RBA) would cut its cash rate rate, probably by 50 basis points to 5.5 percent. That would be the lowest since May, 2006 and an abrupt shift from 7.25 percent in just two months.

It would also show solidarity with the Federal Reserve and Bank of Japan which eased this week, ahead of expected cuts from the Bank of England and European Central Bank next week.

Analysts argue that given the darkening outlook for global growth, combined with the turmoil in financial markets and its painful impact on household wealth, it was no longer appropriate to have rates at levels that dragged on the economy.

“From a macro point of view the case for restrictive policy has completely gone, rates need to be at neutral at most,” said Warren Hogan, head of interest rate research at ANZ.

Neutral is a level that neither impedes nor stimulates growth is generally seen around 5 to 5.5 percent.

Hogan doubted the RBA would try to get to 5 percent in one go by repeating October’s aggressive 100 basis-point cut, the biggest in 16 years, in part because such a move could add to pressure on the Australian dollar, which had suffered extraordinary falls in recent weeks.

The RBA itself had noted that October’s savage cut would not be the norm, a point underlined by RBA Deputy Governor Ric Battellino this week.

“There is still a big task ahead to bring inflation down and this could limit room for manoeuvre on monetary policy,” Battellino told a conference on bankruptcy on Thursday. Core inflation hit a 17-year high of 4.7 percent last quarter.

“The main reason for a more modest rate cut relates to the orderly functioning of markets more than anything else,” said ANZ’s Hogan.

“Ultimately the RBA will take rates lower over the next six months; and if inflation abates and growth recesses, rates could come down a lot,” he added. “The point is that this is not going to happen in the next few months.”

Analysts generally see rates bottoming between 4.25 and 4.5 percent around the middle of next year, which is close to what the futures market is pricing in, though a few saw scope to reach 4.0 percent or lower. History suggests such a game-plan would have a good chance of success.

In the last easing cycle in 2001, rates were cut by a total 200 basis points over 11 months to bottom at 4.25 percent in December. That proved to be an effective stimulus for the economy as rates were heading higher again by the following May.

And monetary policy is being complemented by fiscal stimulus as well. The government this month announced a A$10.4 billion package of give-aways and proposed to bring forward hefty spending on infrastructure.

Meanwhile, the slide in oil prices has brought petrol prices down from record highs, leaving drivers with more money.

Michael Blythe, chief economist at Commonwealth Bank, reckons all these factors combined could be equal to about 5 percent of household disposable income.

“Putting some numbers on these economic drivers means that the economy will grow somewhere in the low 2 percent area over the next year or so,” he argued.

“It may be a weakish result by our standards,” he added. “But it is not a recession. And it will look pretty good relative to many other economies.”

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Economists were asked where would be after the RBA’s meeting on

Nov. 4.

What would the low point for rates be this easing cycle, and when

would it be reached.

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Rates Low point When

ABN AMRO 5.5 4.5 H2 2009

AMP 5.5 4.0 Q4 2009

ANZ 5.5 4.5 June 2009

Barclays 5.5 4.75 Q2 2009

CBA 5.5 5.0 Q1 2009

Citi 5.5 4.0 April 2009

Deutsche 5.5 4.5 Mid-2009

4Cast 5.5 3.75 Q3 2009

GSJBW n/a 4.5 March 2009

ICAP 5.75 5.5 December 2008

JP Morgan 5.5 4.0 Q3 2009

Macquarie 5.5 4.25 Mid-2009

Merrill 5.5 4.25 H2 2009

NAB 5.5 4.5 July 2009

Nomura 5.5 4.75 Q2 2009

RBC 5.5 4.25 Q2 2009

TDSec 5.5 4.0 Q2 2009

UBS 5.5 4.25 May 2009

Westpac 5.5 4.5 Q1 2009

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Low 5.5 3.75

High 5.75 5.5

Average 5.5 4.4

Median 5.5 4.4

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