RBA to keep cutting rates in early 2009

Growing evidence that the Australian economy is contracting and concern about China's economic outlook are fuelling speculation that the Reserve Bank may have to make more rate cuts early in the New Year.

The Reserve Bank has already slashed the official cash rate by more than 300 basis points since the full brunt of the global credit crisis hit Australia in September this year. The cash rate is currently sitting at 4.25 per cent.

Employment data from the Australian Bureau of Statistics this week showed that unemployment has risen to its highest level in a year. The jobless rate now stands at 4.4 per cent, up 0.1 percentage point. There are concerns that the unemployment rate could go as high as 9 per cent by the end of 2010.

This weak employment outlook and deteriorating business confidence suggest that the Australian economy will battle to stay insulated from the global economic downturn. Alarm bells rang this week with new data showing that China's economy is slowing much faster than many have forecast. China's export trade fell 2.2 per cent which is its biggest drop in more than 10 years. The fortunes of Australia's economy are closely linked to China's given its high demand for resources.

In a speech this week, Reserve Bank governor Glenn Stevens said: "The most striking real economic fact of the last few months is not the continued US weakness, but that China's economy has slowed much more quickly than anyone had forecast."

He suggested that many commentators hadn't full appreciated the full impact that a contracting Chinese economy will have on countries like Australia. "There is every chance that the rate of growth of China's GDP is currently noticeably below the 8 per cent pace that is embodied in various forecasts for 2009," he said.

These domestic and global factors suggest that the RBA and federal government policy makers will need to keep cutting rates and introducing new support measures in an effort to keep the economy out of recession. Some market commentators are predicting a 25 basis point cut if the RBA board has an unscheduled meeting in January and then another 75 basis point cut when it officially meets in February.