Experts predict interest rates will fall sharply

AUSTRALIAN interest rates are tipped to fall to the lowest level since the aftermath of the September 11, 2001, terror attacks as the central bank worries about a recession.

Rates tipped to drop under 5pc

AUSTRALIAN interest rates are tipped to fall to the lowest level since the aftermath of the September 11, 2001, terror attacks as the central bank worries about a recession.

One Sydney academic is even forecasting an unprecedented zero per cent interest rate by 2010 on the premise that debt-laden consumers will close their wallets and threaten to push the economy into a deep economic contraction.

Macquarie Group interest rate strategist Rory Robertson said the Reserve Bank of Australia would cut the cash rate, now at 6 per cent, to 4.25 per cent over the next year.

This would be equal to where the cash rate was in December 2001, in the aftermath of the September 11 terrorist attacks in the U.S.

Interest rates have not fallen below that level since the RBA began interest rate being tipped
publishing a target interest rate in January 1990.

Debt futures markets are expecting two bigger-than-usual interest rate cuts by Christmas.

They expect the RBA to cut interest rates by 75 basis points next month and follow up with another three-quarters of a percentage point move in December.

Another big rate cut next month, following from October's 1 percentage point move, would make it the most generous series of official interest rate relief since 1992, in the aftermath of the last recession.

Such cuts would take the cash rate to 5.25 per cent in November and 4.5 per cent by Christmas, a level not seen since mid 2002.

"As the financial conditions continue to deteriorate, the Reserve Bank is becoming increasingly worried about the outlook for growth," Mr Robertson said.

"So the Reserve Bank is cutting aggressively to limit the risk of recession in Australia."

University of Western Sydney associate professor of economics and finance Steve Keen is radically bullish on interest rates, predicting a 2 per cent cash rate by the end of 2009, dropping to zero per cent in 2010.

Dr Keen said the RBA would become more concerned about high household debt levels than inflation, if deep rate cuts in 2009 failed to stimulate the economy.

"The debt bubble is bursting and when it bursts, people stop spending and borrowing," he said.

"They (the RBA) can cut the pain but they can't boost the economy."

Earlier this month, the RBA cut interest rates by 100 basis points for the first time since May 1992.

The RBA cut rates by one percentage point on five occasions during 1991 and 1992.

Dr Keen said another series of deep rate cuts was needed now because household debt levels made up a much bigger portion of gross domestic product than in the early 1990s. He said central bank policymakers before the 1930s Great Depression focused on consumer price inflation and ignored asset prices, and this mistake was repeated more recently.

"Reserve banks everywhere got it wrong, not just ours," he said.

"They focused on the wrong problem, which was inflation."

Macquarie's Mr Robertson said the RBA was more concerned about reversing the 12 rate rises from 2002 to March this year and would deliver bigger-than-usual rate cuts before Christmas to reduce home mortgage and business borrowing rates.