Reserve Poised To Cut Rates After Black Day For Markets

The Age

Wednesday October 1, 2008

Vanessa O'Shaughnessy, Michelle Grattan, Ian Munro and Anne Davies

THE Reserve Bank could slash official interest rates by as much as half a percentage point next week in a bid to shield Australia from what threatens to become the biggest worldwide financial meltdown since the Great Depression of the 1930s.

The Reserve is expected to act decisively at its board meeting on Tuesday after a day of turmoil on world markets yesterday, triggered by the surprise refusal of US legislators to pass a $US700 billion ($A853 billion) bail-out package for the teetering financial system.

But if the Reserve Bank acts, there is no guarantee that Australian borrowers will get the full benefit, with Treasurer Wayne Swan conceding yesterday that the worsening global credit squeeze might in some circumstances justify banks passing on only part of an official rate cut.

The warning came as world stockmarkets went into freefall after the failure of the US Government's banking bail-out to be approved by the House of Representatives.

News that the plan crafted over the weekend was rejected stunned stock traders into a selling frenzy that sent New York's Dow Jones industrial average crashing almost 7%.

The Australian sharemarket followed Wall Street down, plunging 4.3% and losing about $60 billion in value as fears grew that Australia was facing a heightened risk of recession.

Yesterday's losses took the Australian market to more than 32% below its all-time peak of late last year, leaving millions of people carrying big losses on their superannuation accounts and other investments.

After the narrow defeat of the US package, Mr Swan and Prime Minister Kevin Rudd swung into action to reassure Australians that the local economy is strong and that Australia's big four banks are among only 20 AA-rated banks in the world.

Mr Rudd said he spoke with British Prime Minister Gordon Brown and Australia's ambassador to the US, Dennis Richardson, about what could be done to pressure the US Congress to pass a similar bill when it is re-submitted later this week.

In light of the worsening crisis, financial markets now expect the Reserve Bank to cut its cash rate by half a percentage point to 6.5% next week.

Macquarie Group interest rate strategist Rory Robertson said there was a strong case for "large, synchronised global rate cuts", because of the many threats to the global economy.

But Mr Swan, who has previously taken a hard line on the issue of banks not passing on rate cuts in full, yesterday left the door ajar. "In the normal course of events a Reserve Bank rate cut is one that should be passed on by the banks," Mr Swan said.

"In the situation we're in at the moment, it is much more complicated and if the banks think that they don't have to necessarily pass on that official rate cut, they'll want to put forward a very good case for that decision."

But Opposition Leader Malcolm Turnbull said the banks should pass on "the full amount" of any future Reserve cuts. "There's no doubt that the banks have had more difficulty financing their loan books in recent times. But the major banks certainly have been able to do that," Mr Turnbull said.

Platypus Asset Management portfolio manager Prasad Patkar said markets were unlikely to settle until the US Congress reconsidered the bail-out bill. "Our view is that the rescue package will go through ... there's really no other choice," Mr Patkar said.

WORLD

? Rescue plan unravels PAGE 10

ANALYSIS & DEBATE

? Blood on the street PAGE 13

COMMENT & DEBATE

? Editorial PAGE 14

© 2008 The Age

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