The weakening global economic outlook has prompted ANZ to slash its forecast for the official cash rate to a new low point of 3.50% towards the end of 2009.

ANZ is expecting the Reserve Bank of Australia (RBA) to cut rates by 0.50% at its December meeting and then return to the normal operating mode of 0.25% rate adjustments.

"We expect further rate cuts through the first half of 2009 in response to weak economic growth and rising employment," it said in its report.

Beyond that, ANZ is expecting a final 0.50% rate cut in late 2009. "We fear the worst is yet to come and, despite these big rate cuts, can't rule out a quarter of negative growth over next year," ANZ said in its report. "While this may seem like a bold forecast, it’s almost fully priced into money markets."

Financial markets are expecting a 1% rate cut in December and a further 0.50% in February to arrive at a low of somewhere between 3.50% and 3.75% in March.

"While we expect the RBA to deliver ultimately on current market expectations, we're of the view that it will take much longer than current pricing suggests," ANZ said.

The RBA revised its economic forecast and now expects the economy to grow by 1.5% in 2008/09, down from its previous forecast of 2.25% set three months ago. "Falling interest rates, increased homeowner grants and a housing undersupply are positives for house prices," said Shane Oliver, chief economist with AMP Capital Investors. "It's argued that the fall in the mortgage rates of nearly 2% since September combined with increased first homebuyer grants will spur an upswing in Australian house prices."

Tim Riley, marketing manager of Investors Direct Financial Group, said lower interest rates are a plus for property investors because it will become cheaper to get into property. "For current investors, it gives them cash-flow relief and, combined with rising rents, higher return. For new investors, it's also a positive because they wouldn’t have to contribute as much to the purchase."

However, Riley believed that the dramatic falls in rates could mean that house price growth may soften further. "This is a double-edged sword. While dramatic rate cuts are a good thing, it needs to be approached with caution. Property selection is more important now than in the past. So focus on properties with high potential for value growth as well as high yield."

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