Economists predict global wave of rate cuts

AUSTRALIAN economists are now betting central banks worldwide will slash cash rates in a unified assault on the global financial crisis.

Economists predict global wave of rate cuts

AUSTRALIA'S dramatic official interest rate cut caused a slight flutter in Asia but the outlook in global markets remains overwhelmingly gloomy.

Australian economists are now betting central banks worldwide will slash cash rates in a unified assault on the global financial crisis.

ANZ economist Amy Auster said this would help liquidity problems in world financial markets but would not be "the magic pill".

"It's not a cure-all because what we're seeing is not just a shortage of liquidity," she told BusinessDaily.

"We've had so many failing institutions that banks are concerned about the credit quality and the ability to get re-paid by other financial institutions. This will take time to work through."

European shares, rattled by their biggest one-day percentage fall on Monday, shot into the black at the opening, then fell back into the red before steadying. London's FTSE 100 index was down slightly at mid-morning.

Finance ministers from all 27 EU countries met overnight to begin work on a joint response to the financial crisis.

The Bank of England meets tomorrow with speculation it will cut rates by 0.5 per cent to 4.5 per cent.

US futures also gained yesterday on expectations other central banks could follow the RBA and slash interest rates.

Asian stocks still copped another drubbing, with Japan's Nikkei index falling 3 per cent to five-year lows.

However, the RBA's rate cut appeared to soften what could have been an even bigger fall.

Japan's central bank said it would leave its key interest rate unchanged at 0.5 per cent.

Crude oil managed to break a five-day tailspin to rise as much as $US2.94 - or 3.4 per cent - to $US90.75 a barrel in trade in Asia.

Investment bank UBS believes the US Federal Reserve will halve its benchmark interest rate to 1 per cent by April.

It says the European Central Bank, which last week indicated it was ready to cut interest rates, will slash its main rate to 3 per cent from 4.25 per cent by the end of next year.

ANZ's Ms Auster has downgraded global growth to just under 3 per cent next year, equating to a global recession in the first and second quarters of this year.

She said the reality that the US was in recession, and the prospect of a world recession, was beginning to hit home with investors.

"People were quite focused on the political manoeuvres in Washington to bail out the financial system," she said.

"There is a broader realisation that this problem is bigger and will only be dealt with over time."