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Weak global economy and falling inflation point to big rate cut

by Staff Reporter8 minute read
The Adviser

Bleak forecasts for the global economy from the IMF and the biggest quarterly decline in domestic inflation in more than ten years have paved the way for a substantial rate cut when the Reserve Bank meets next week.

In its World Economic Outlook released overnight The International Monetary Fund (IMF) said the global economy would grow by just 0.5 per cent this year and warned that the financial crisis could intensify should governments not take appropriate action to mediate its effects.

“Unless financial strains and uncertainties are forcefully addressed the pernicious feedback loop between real activity and financial markets will intensify, leading to even more toxic effects on global growth.”

Official data from the ABS yesterday also revealed that the CPI fell 0.3 per cent in the December quarter, the biggest fall since 1997. This brings the annual inflation rate to 3.7 per cent, compared to five per cent in just the previous quarter.

Shane Oliver, chief economist at AMP Capital said the December quarter CPI confirmed inflation was “yesterday’s story” and gave the green light to substantial rate cuts in the coming months.

AMP expects the RBA to cut the cash rate by 0.75 per cent when it meets next week and to reach 2.5 per cent by mid-2009.

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