THE Reserve Bank is increasingly likely to slash official interest rates by half a percentage point at its meeting on Tuesday, amid soaring funding costs for banks and signs that households are tightening their belts.
The global financial crisis continues to drive up the cost of funds for lenders, prompting economists to think the Reserve will have to cut the official cash rate by at least 0.50 percentage points to ensure banks pass on a 0.25 percentage point cut to standard variable mortgage rates.
The bigger than usual move may also be needed to ensure banks do not embark on yet another round of unofficial rate increases, on top of the 0.55 percentage point sting they have already added since January.
The chief economist at Morgan Stanley, Gerard Minack, said a 0.50 percentage point official cut was "likely" because the cost of short-term debt had blown out to its widest since the credit crunch began and was 10 times its historic average.
Economists at ABN Amro are also expecting a 0.50 percentage point move.
"Recent extraordinary events in global financial markets are a clear negative for Australia and we expect more aggressive action from the RBA," an economist at ABN Amro, Felicity Emmett, said.
It is not uncommon for the Reserve Bank to begin a rate-cutting cycle with one or more moves of a half a percentage point. The last time it did so was in April 2001.
Meanwhile households are showing signs of increased strain as mortgage rates remain at the highest levels for a decade. Credit figures released by the Reserve yesterday show the annual pace of new borrowing for housing has fallen to its slowest rate in 25 years.
Housing debt grew by just 9.4 per cent to $971.5 billion, down from the 20 per cent plus annual growth rates clocked during the peak of the property boom in 2004.
"Australian consumers are effectively on a borrowing strike - refusing to take on more debt in these unsettled times," the chief economist at CommSec, Craig James, said.
Building approvals continue to slump, with building in NSW remaining at near record lows.
"The world has just experienced the most disturbing financial turmoil in many decades," an economist at Macquarie Bank, Rory Robertson, said. "Near term, it's a growing struggle to think of good reasons why the RBA won't cut to 6.5 per cent [from 7 per cent now]."
