The end of the most aggressive rate-cut campaign since the early 1990s recession could be in sight.
This speculation comes after the Reserve Bank yesterday escalated efforts to protect the Australian economy from the global downturn with a full percentage point cut.
Although economists expect a further 75-point fall in interest rates in coming months, they said yesterday's surprise 100-point drop to a seven-year low of 4.25 per cent could signal the last major cut.
The central bank yesterday stepped up its efforts to prevent the economy from following the world into recession by slashing rates to support the Government's $10.4billion stimulus package.
The drastic cut means that 300 basis points have been sliced from official rates in just four months, the fastest fall since the bank started cutting rates from above 17 per cent in January 1990.
Analysts believe the economy is now "front-loaded" with stimulus, which should begin to spur economic activity and a turnaround in domestic spending in the next three months.
The reaction, however, on financial markets was mixed, with equities sold off strongly as domestic banking stocks were dumped. The S&P/ASX200 index closed the day down 153 points (4.2 per cent) to 3528.2, while the All Ordinaries shed 145.6 points to 3473.4. The rout was led by Commonwealth Bank, which fell 5per cent, as investors feared falling rates would weaken the bank's earnings outlook.
JPMorgan interest rate analyst Sally Auld said the RBA's cuts and the fiscal stimulus would begin to have "traction" in the early months of the next calendar year.
"I think the RBA is signalling a couple of things. They are happy with the state of policy," she said.
"In the statement, they are hinting that there is a lot of stimulus in the system that should gain traction in 2009. The days of 100 and 75-basis-point moves could be over. They are definitely front-loading it.
"What the RBA is saying is that they will watch the economy carefully to see what happens over the next couple of months."
The Australian dollar sold off slightly on the back of the rate cut and, despite the expectation of smaller rate cuts in the future, markets are still positioned for a lower cash rate.
The RBA does not meet again until February, but the markets are fully priced for a cut of at least another 75 basis points.
The major Australian banks were quick to cut home-lending rates, with the CBA and NAB committing to pass through the full 1 per cent reduction.
Westpac will cut its standard variable and business rates by 80 basis points, while ANZ will only reduce its home lending rates by 83 basis points.
While cutting rates, Westpac was also testing the overseas funding markets, but without using the Government's guarantee for wholesale capital raisings.
The bank, fresh from implementing the St George merger, yesterday announced it had raised up to $300 million in the European commercial paper markets.
The short-term issuances were denominated in Australian dollar, euro and British pounds and will shore up the bank's short-term funding needs.
The NAB, in comparison, will use the Government's guarantee for a Eurobond issue in the next few weeks. It is understood each of the major four banks in Australia, plus overseas banks, are assessing appetite for a large-scale bond offering in Europe.
In the RBA statement, governor Glenn Stevens said the cash rate was now firmly in an "expansionary" setting, which the central bank hoped would prompt increased economic and business activity. "Given trends in money market yields, most lending rates should fall significantly and will also reach below-average levels," he said.
Deutsche Bank economist Phil O'Donaghoe said the lower rates, both from commercial trading banks and on wholesale markets, would help sustain business investment.
The most recent numbers showed that over the current financial year, domestic business and corporates could spend nearly $103 billion.
"This rate cut will be helpful," Mr O'Donaghoe said.
