Borrowers eye rate-cut result on Cup day

Melbourne Cup Day 2010 in Australia. Photo / Getty Images

Melbourne Cup day could be a lucky one for Australian borrowers as expectations grow that the central bank will cut interest rates tomorrow.

Eleven of the 17 economists surveyed by AAP said the Reserve Bank of Australia (RBA) would cut the cash rate from 4.75 per cent to 4.5 per cent when its board meets tomorrow - a sign the economy is slowing.

The RBA has moved the cash rate, either up or down, on the past five Melbourne Cup days.

Australia is New Zealand's largest trading partner - taking 24 per cent of exports in the year to June 2010 - and so businesses here will watch closely for any changes made across the Ditch.

Tap and showerware maker Methven this month downgraded its full-year profit expectations largely because of a fall in Australian construction activity.

Fletcher Building said difficult trading conditions, particularly across the Tasman, would cut its first-half earnings by 10 per cent.

Australia was listed as one of the main culprits when carpet maker Cavalier Corporation this month advised the market that sales of some of its products during the three months to the end of September were 20 per cent down on the previous year.

Citigroup head of economics Paul Brennan said September quarter inflation data was the turning point that helped the low interest rate outlook.

He said the minutes of the RBA's October board meeting showed the board was expecting global and Australian economic growth to slow and inflation outlook to ease.

"The RBA has indicated that an important consideration at the November board meeting would be the third [September] quarter inflation data," Brennan said. Underlying inflation, which excludes extreme price movements in some categories, rose 0.3 per cent in the September quarter for an annual pace of 2.5 per cent, according to the Australian Bureau of Statistics.

That was much lower than market forecasts of 0.6 per cent for the quarter, and was down from the June quarter figure of 0.8 per cent.

The RBA adjusts the cash rate to keep the inflation rate in a target band of 2 to 3 per cent, on average, over the course of the economic cycle.

And it has been known to cut the cash rate to stimulate growth in times of economic trouble.

Global financial markets have been volatile in recent months because of worries over the eurozone government debt crisis. News of a resolution to the crisis was announced last week, involving banks taking a 50 per cent writedown on Greek debt and raising the eurozone bailout fund to €1 trillion ($1.7 trillion).

Commonwealth Bank senior economist John Peters said the RBA would be in a wait-and-see mode tomorrow.

"[The RBA] will see how it pans out and what the economic fallout from Europe is and whether this positive sentiment is going to continue," he said.

"They've got time to assess the possible collateral damage to Australia. It'll be a close call, but I think they'll remain where they are."

HSBC chief economist Paul Bloxham said the RBA's decision would be close.

"A case could be made for either sitting still or cutting rates [this] week, depending on the RBA's forecasts and how they view the balance of risks," Bloxham said.

- AAP