Australian Economists Foresee RBA Keeping Cash Rate Below 4% in 2012

Australian economists forecast that the Reserve Bank of Australia will keep the overnight cash rate below 4 per cent for 2012. The basis of their outlook is slower global growth in the first quarter of the coming year because of the European debt crisis.

In contrast, futures traders foresee the key lending rate dropping by 125 basis points to 3 per cent by middle of 2012 as they factored in the impact of the debt crisis as a major consideration.

The more conservative prediction of economists stems from two recent 25 basis points reduction made by the RBA which cut the cash rate to 4.25 per cent and forecasts of two more rate cuts in February and March.

"What will become apparent in the first half of next year is that Europe has slipped into recession.... That in turn will act as a significant drag on global growth and commodity prices. We are forecasting cuts of 25 basis points in both February and March," The Australian quoted AMP Capital chief economist Shane Oliver.

Economists also believe that the euro debt crisis is expected to dominate the markets until mid-2012, but they are optimistic that a China and U.S.-led recovery would boost global growth by the second half of next year which would improve stock markets and boost the Australian dollar to US$1.10.

They pointed out that China's decision to lower borrowing rates and expected more rate cuts in early 2012 would give small- and medium-sized businesses capital boost and increase demand for key commodities such as iron ore and coal which China imports from Australia.

However, in the case of the European Central Bank's offer of almost $500 billion loans with 1 per cent interest rate which was snapped up by banks in the region, economists expressed concern that the banks would just hoard the money instead of loaning it to boost the region's sagging economy.

"Europe is stuck in a vicious cycle of fiscal austerity leading to economic contraction, budget deficit blowouts and ratings downgrades.... More direct action from the ECB - to more overtly ease monetary conditions and buy troubles bonds - would be preferred and is ultimately still likely to be required," Oliver told The Herald Sun.