By Wayne Cole
SYDNEY, Nov 21 (Reuters) - Investors are wagering
Australian interest rates could soon be cut by more than a full
percentage point as collapsing share markets and deepening
gloom over the global economy argue for urgent action to head
off recession.
As U.S. equities <.SPX> fell by 6 percent for a second day
running and Treasury yields hit 50-year lows, the Australian
futures market <0#YBA:> rushed on Friday to price in rates of
4.01 percent by Christmas, a long way from the current 5.25
percent.
That piles pressure on the Reserve Bank of Australia (RBA)
to take drastic action, even though it has already cut its key
cash rate by 2 full percentage points since September in the
most aggressive easing since the 1990/91 recession.
"The market's basically signalling that nobody knows what
the RBA will do anymore," said Tony Meer, chief economist at
Deutsche.
He noted many investors had been badly wrong-footed by the
RBA when it cut by more than expected at each of its past two
meetings. Indeed, the central bank's own staff had initially
recommended a cut of 50 basis points in November but just a few
days later the board voted to go by 75 basis points.
Likewise, the Bank of England had stunned markets by
slashing rates by 150 basis points this month while the Swiss
central bank had sprung a surprise 100 basis-point easing on
Thursday.
"Having a strong view on what central banks will do can be
very costly," said Meer, with some feeling.
He was hardly alone in being wary on making calls on rates.
"It's not impossible they could cut by more than 100 basis
points, after all the RBA has even surprised itself with the
scale of its cuts so far," said Michael Blythe, chief economist
at Commonwealth Bank.
WATCH BUSINESS INVESTMENT
"But we would think 100 basis points is the most the RBA
would go, and that depends crucially on what business
investment data shows next week," argued Blythe.
Figures on business spending are due on Nov. 27 and are
likely to show firms scaled back formerly ambitious investment
plans given the turmoil in markets and tightening credit.
"If there's a really dramatic pullback in plans, then the
RBA will go 100," said Blythe. "If it's not so bad, and
remember resource investments are planned for the very
long-term, then the RBA may ease by less."
The RBA holds its next monthly policy meeting on Dec. 2, but
does not usually hold a meeting in January which might add to
the argument for a sizeable easing next month.
Still, Rob Henderson, head of market economics at
nabCapital, felt investors were going too far by pricing in
4.00 percent by year-end.
"A cut of 100 basis points is a possibility, particularly if
shares keep sliding like this," said Henderson. "But we still
think they'll go 75 because, when you get down to it, Australia
is better placed than the U.S. or the U.K or Japan."
He argued that rate cuts here had more impact since they
fed directly through to mortgage rates, putting money
immediately into people's pockets. In the United States, most
mortgages were fixed and linked to agency and Treasury yields
-- assuming borrowers could get a mortgage amid the credit
crunch.
The Australian dollar had also fallen by over 30 percent in
three months, providing a big boost to exports, and a
government stimulus package of A$10.4 billion was about to hit
wallets in December.
RBA Governor Glenn Stevens this week argued that
Australia's fundamentals were still sound and the main threat
was that the country could talk itself into a recession.
(Reporting by Wayne Cole; Editing by Mark Bendeich)
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