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Australia rate cut stuns, markets thirst for more

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Wayne Cole and Kevin Yao
Tuesday, Oct 7, 2008

Australia stunned markets with its steepest interest cut in 16 years on Tuesday and investors expected that other central banks would follow suit in a coordinated move to combat the global credit crisis.

The 1 percentage point reduction in the Reserve Bank of Australia’s benchmark rate was twice as big as expected, underscoring the increasingly strong medicine needed to jolt the world’s financial markets back to health.

“It looks to me that the RBA’s rate cut was no fluke,” said Suresh Kumar Ramanathan, head of strategy at CIMB Bank in Kuala Lumpur.

“It means the rest of the global central banks may have had a teleconference to up the rate cut story. Bottomline, it’s a strong signal to the market that unified action will come after all,” he said.

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The Bank of Japan held its benchmark interest rate at 0.5 percent, as analysts had expected, but played up the risk of global market turmoil. Its more cautious tone about the economy at home left the door open for an interest rate cut.

  • A d v e r t i s e m e n t

Investors expect the Bank of England to cut rates at its policy meeting this week and are pricing in cuts from the U.S. Federal Reserve and the European Central Bank in the near future.

Fed fund futures have priced in a probability of a 75 basis-point cut by the U.S. central bank this month.

Federal Reserve Bank of Dallas President Richard Fisher, considered an inflation hawk, said capital markets were in “semi-panic.”

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This article was posted: Tuesday, October 7, 2008 at 4:00 am

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