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Forget one big rate cut; expect two or three smaller ones

Discussion in 'Real Estate' started by Billv, 19th Aug, 2008.

  1. Billv

    Billv Getting there

    15th Jul, 2007
    Sydney, NSW
    Even the dogs are barking that the Reserve Bank board is almost certain to cut the official interest rate in two weeks. But those expecting a cut of 50 basis points are barking up the wrong tree.

    You have to ask if Reserve governor Glenn Stevens looks like a 50-basis-point kind of guy. Is he the kind of guy who would go for the grand gesture? The kind who'd panic?

    Or is he the kind who definitely would not panic; who would keep his cool and act in a quiet, confident, carefully measured way?

    He looks like a 25-basis-point kind of guy to me. Speak softly and carry a big stick. And we do know he is the kind who would move the rate by 25 points two months in a row.

    What's more, if the object of the exercise were to make a big impression on consumers and business people — and what central bankers call the "announcement effect" is an important element when you are trying to influence psychology and change behaviour — it's not at all clear that one 50 beats two 25s in quick succession.

    If you have been alive for a while, you know that central banks rarely move rates just once when the time comes to change direction. If 25 points were all you thought you needed to do, you wouldn't bother.

    So we can expect two or three rate cuts before the end of the year. But, at this stage of the game, a total cut of between 0.5 and 1 percentage point is all we should expect.

    Remember that, although deputy governor Ric Battellino was right to remind us last week that the Reserve cannot wait for a fall in inflation before it starts cutting rates because it has to act pre-emptively, we still have an inflation problem and downward pressure on inflation needs to be maintained.

    more here rate cut; expect two or three smaller ones