Australia cuts OCR

By Phil Boeyen, ShareChat Business News Editor

Wednesday 3rd October 2001

As expected Australia has again lowered interest rates although not by as much as some had been hoping.

The Reserve Bank of Australia dropped the official cash rate by 25 points Wednesday to 4.5%, the fifth reduction in interest rates this year and bringing the rate in line with those of the 1960s.

Unlike the US and New Zealand the RBA did not lower interest rates in the immediate wake of the US plane attacks, although it had dropped them by 25 points just a week before.

The RBA is picking that global growth will be weaker than previously forecast due to the fallout from the terrorist strikes and net exports are unlikely to contribute as much to growth as they did over the past year.

Market commentator Standard & Poor's says Wednesday's easing disappointed market expectations for a more aggressive 50 point cut but says easing early in September obviated the need for an inter-meeting move or a larger rate cut.

S&P director of economic research, Stephen Kirchner, says Australia's exchange rate is doing most of the heavy-lifting in terms of insulating the economy from the world economic downturn with the lower dollar so far this year delivering more stimulus than reductions in official interest rates.

"While the market will look for further easings in monetary policy, we remain skeptical. We thought the RBA overdid it with its early September easing. As it turned out, the events of 11 September were a retrospective justification for that move and warranted a further modest easing today.

"However, the RBA will be increasingly mindful of the need not to overdo monetary stimulus following its experience in the wake of the 1987 stock market crash. It is quite likely that the Fed and RBA will be quick to take back the easings put in place in recent months in the new year."

Standard & Poor's is expecting the US to tighten rates before the end of March 2002 and says the RBA is likely to follow suit soon after.

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