The weakening global economy and signs of domestic slow-down may prompt the Reserve Bank of Australia to make more - larger - rate cuts to shore up growth, according to a leading economist.

The latest report showing Performance of Manufacturing Index (PMI) contracting even more to 47.2 in September is further evidence of the domestic slow–down, according to Savanth Sebastian, equities economist with CommSec.

“Rate-cut speculation is running rampant at present and the case for a substantial easing cycle is starting to gain traction,” Sebastian said. “The weakness in the latest manufacturing reading continues to highlight the slowing domestic economy, adding weight to multiple rate cuts in coming months.”

However, Sebastian noted that the fundamentals for the domestic economy suggest that Australia is in a better position than most of our overseas counterparts. He said Australia’s dependence on China, the strength of the proposed business investment plans, the mining boom and tight labour markets are likely to play a big part in ensuring strong growth in coming years.

“The Reserve Bank is likely to cut interest rates by at least 25 basis points next week – and the continued turmoil on global markets will probably take precedence over domestic economic news. However, if the US rescue package is not passed through congress by next week, the possibility of a larger rate cut is highly likely.”

Sebastian said that while credit markets remain tight, local banks are likely to see added pressure on funding costs. As a result, the Reserve Bank may cut rates by as much as 50 basis points (bps) next week, to ensure that Australian banks are able to pass some of the benefit on to customers.

“We expect the Reserve Bank to cut rates by at least 25bps next week to shore up growth, with 50bps certainly a possibility. In the current environment any rate cut by the Reserve Bank needs to be substantial to allow local banks to pass lower interest rates through to customers. Further rate cuts of 25bps are expected in both November and February.”

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