Rates to keep falling in 2012

Official interest rates will fall at least twice early next year as the Reserve Bank analysts say. Minutes from the December 6 RBA board meeting say the weakness in Europe and the “non-trivial possibility of a very sharp contraction” meant there was scope for a modest reduction in rates.

Futures traders have priced in a major escalation in the debt crisis, betting the official cash rate will drop 125 basis points by mid next year to 3 per cent.

Most economists are far more cautious, tipping the RBA will follow up its November and December cuts with another two back-to-back reductions in February and March, ending the cutting cycle.

TD Securities analyst Annette Beacher is an exception and expects rates to drop to 3.5 per cent by June. Ms Beacher says that if the European crisis “dissolves into outright credit market dysfunction”, the RBA can be bold and has the ammunition to cut rates sharply and quickly.

Source: Herald Sun