Don't bank on zero cash rate: RBA chief

Australia's central bank chief has signalled more interest rate cuts are likely and
financial markets expect rates to fall another full percentage point over the next
three months, as the country battles the global economic crisis.
Reserve Bank of Australia (RBA) governor Glenn Stevens told a bi-annual
parliamentary hearing in Canberra the nation's financial system was in good shape,
limiting the need for the cash rate to fall to zero per cent.
"It is not my present expectation we're going to find ourselves at nothing," Mr
Stevens told the House of Representatives Economics Committee on Friday.
But a new all time low of 2.25 per cent is on the cards, with debt futures markets
on Friday firming up expectations for a 50 basis point cut in March and a further 25
to 50 basis points by May on the back of Mr Steven's remarks.
"The market's currently toying with something like two or two and a quarter per
cent," he said.
"I have no particular desire today to either encourage or disabuse them."
Australia's cash interest rate of 3.25 per cent is one of the higher such rates in
the industrialised world, even though it is at the lowest level since 1964 following
400 basis points of easing since September.
The US federal funds rates is in a target range of zero to 0.25 per cent and Japan's
benchmark rate is 0.1 per cent.
Mr Stevens indicated that while Australian rates are unlikely to approach American
or Japanese levels, there was still scope to cut.
"We'll be prepared to go low enough to what is needed," he said.
RBC Capital Markets senior economist Su-Lin Ong said the governor was leaving room
for easier policy, which could take the cash rate to at least 2.5 per cent.
"Perhaps more telling was the governor's admission that there was a greater degree
of uncertainty over economic forecasts at turning points in an economy, that
confidence remained fragile and that the global growth backdrop was especially
challenging," she said.
"In that context he confirmed that there was room for further rate cuts if necessary."
Commonwealth Bank of Australia chief economist Michael Blythe said future rate cuts
would be smaller as Mr Stevens believed the RBA's monetary policy settings were
already having an expansionary effect.
"The RBA sees itself as having eased aggressively and well ahead of the domestic
economic data," Mr Blythe said.
"And any further moves would be more modest in scope and less rapid."
Westpac chief economist Bill Evans is bullish on the rates outlook, tipping a cash
rate floor of two per cent.
"We now expect a 25 basis point cut in March to be followed by a series of further
25 basis point cuts, with the low point being reached in the third quarter of 2009,"
he said.
JPMorgan chief economist Stephen Walters expects a 50 basis point rate cut next
month after the RBA's March 3 board meeting.
"The trajectory of global growth is weaker than that assumed in the official growth
forecasts - this leaves open the door for further monetary policy support," he said.
Mr Stevens told the committee that Australia would survive the financial crisis
because recent rate cuts were more easily flowing through to lower lending rates,
unlike in other countries.
"So there are reasonable grounds at this stage to think that the Australian economy
will come through this very difficult episode certainly not unscathed, but well
placed to benefit from a renewed expansion," Mr Stevens said.
Mr Stevens said Australia's financial system was healthier than other countries,
with lending institutions still earning good profits.
"We have claimed all along that Australia was better positioned than many countries
to ride out the international difficulties," he said.