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The pressure is on for a BIG interest cut


In a shock-and-awe move, the Reserve Bank of Australia has cut its official cash rate by a full percentage point, putting pressure on its New Zealand counterpart to follow suit.

The cut, from 7 to 6 per cent, is the biggest the RBA has made since 1992, and was twice what the market had expected.

"I think it is telling us something about the global environment," ANZ National Bank chief economist Cameron Bagrie said.

"The message here is that if you need to go, don't muck around."

Two Australian banks, Westpac and the Commonwealth, have said they will reduce their variable home loan rates by 0.8 per cent, passing on most of the official cash rate cut.

Mr Bagrie thinks New Zealand's Reserve Bank will also cut the official cash rate by a percentage point to 6.5 per cent by the end of the month, and possibly before the next scheduled review on October 23.

"If the RBA is so worried about the risks that it needs to cut by 100 basis points, then think about New Zealand," said Mr Bagrie.

We have had two quarters of negative growth. Today's quarterly survey of business opinion suggests we will get a third and possibly a fourth."

The Australian bank cited signs that the global slowdown is spreading to Asia and that seized-up credit markets are making life much more difficult even for creditworthy borrowers.

Unlike New Zealand, the majority of Australian home loans are on floating rates, which means the RBA move should flow through to mortgage-holders more quickly and directly than a similar move here would.

Bank of New Zealand economist Craig Ebert said the Australian move increased the chances that Reserve Bank governor Alan Bollard would also cut more than the half-a-percentage point the market regards as a done deal, and that he might act before October 23.

"We wouldn't rule out a full percentage point, although there's nothing disturbing enough in the markets to really justify that," Mr Ebert said.

"There's a case for trying things that might restore confidence. It might work. And there's little chance that it will start another inflationary credit binge."

Goldman Sachs JBWere economist Shamubeel Eaqub backed a full percentage point cut.

"The current global situation where there is a crisis of confidence needs co-ordinated action from central banks around the world," he said. "The RBNZ cannot conduct policy in isolation."

The Reserve Bank and Treasury have been keeping in close touch with their Australian counterparts.

Dr Bollard has already indicated a willingness to "front load" the interest rate easing he has started on by delivering a half-point cut on September 11. This was twice what the market had expected.

But he has said that official cash rate cuts should be a response to the economic outlook rather than to turmoil on financial markets, which central banks have other tools to address.

The magnitude of the Reserve Bank of Australia move has prompted some market speculation that it might be part of a co-ordinated move by central banks around the world to restore confidence after "meltdown Monday", when sharemarkets around the world, rattled by frozen credit markets and the prospect of a global recession, fell sharply.

The New Zealand sharemarket started the day at a three-year low as panic selling spread to Asian markets.

It bounced back to close 1 per cent down, buoyed by the surprise Australian rate cut.

The market's moves followed the worst one-day percentage fall on record for European share markets, which sank to four-year closing lows as investors dumped shares.

In the US, the Dow closed below 10,000 points for the first time in four years, reflecting concerns that fallout from the escalating credit crisis will drag the global economy into recession and cripple profits.

The Australian rate cut aided a slight recovery in the New Zealand dollar, which was trading at US63.35c at 5pm yesterday, down from US65.15c the previous day.

In the New Zealand Institute of Economic Research's quarterly survey of business opinion, out yesterday, what firms were saying about their own activity had fallen to levels last seen during the 1991 recession.