Interest rates to bottom out below 3% in 2009

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Despite the mid-year tax cuts, a slew of bleak economic data may result in even deeper ones from the Reserve Bank of Australia when it meets next month, according to a leading economist.

Shane Oliver, head of investment strategy and chief economist at AMP Capital Investors, said the RBA could cut the official cash rate by up to 1% to 4.25%. "Given the scale of the slump now occurring globally and the need to head off a sharp fall in house prices in view of the heavily indebted status of many Australian households, our view is that the cash rate will ultimately have to fall below 3% at some point next year. In the short term, the RBA appears to be on track for another 0.75% to 1% rate cut next month."

Oliver said that while 2009 is likely to be pretty tough, all is not lost. "Australia's long-term growth prospects remain bright given our exposure to China - which will resume its rapid industrialisation process after the current pause - and our financial system is in far better shape than those in many other countries," he added.
"In the short term, it should be kept in mind that a fair amount of stimulus is being pumped into the household sector and there's a lot more to come. Of course the uncertainty caused by rising unemployment means a big chunk of this will be saved, but it will certainly help avoid a big collapse in spending and - more importantly - at some point later next year, it will drive a recovery."

 

 

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