Rates cuts almost inevitable

The Reserve Bank meets on Tuesday with the chances of a cut in interest rates at their highest since the aftermath of September 11. RBA Governor Ian Macfarlane has signaled that rate cuts are probably on the way, it now seems just a matter of time.

While the Australian economy remains quite robust at the moment, gloom in the international economy has risen in recent weeks over fears the US economy might drag the world into a deflationary spiral. US Federal Reserve chairman Alan Greenspan has said the chances of deflation in the US are low but the Fed nevertheless cut official rates this past week by 0.25 percentage points to 1 per cent, their lowest level since 1958.

A precautionary cut of the same size in July by our Reserve Bank is quite possible but the chances are probably less than 50-50. But rate cuts of up to 0.5 per cent are almost certain in coming months. The stubborn US economy is taking its time to lift out of the doldrums increasing the chances that an international-induced slowdown in Australia will gather pace. A double hit to exports may well be under way with slowing world demand compounded by a rising Aussie dollar.