RBA set to slash rates to a 45-year low

Just how low will official interest rates go? That is the big question that economists and the nine members of the Reserve Bank board are grappling with ahead to tomorrow’s RBA board meeting.According to a poll from news agency Reuters, just under half of Australia’s top economists are predicting that the RBA will slash the official cash rate by 1% (or 100 basis points) from 4.25% to 3.25%.This would be the lowest cash rate since 1964, when regulators set official interest rates at 3.16%.

Politicians and business groups are unanimous in their support for deep rate cuts to get the economy moving again, and most economists expect the RBA will be forced to cut rates again in the next few months as the economy slows further.

But some economists are becoming concerned about the potential for rates to go too low.

Adam Carr, a senior economist at ICAP Australia, argues that dropping rates to 2.5% – as many economists expect – will spark another debt binge that will simply add to Australia’s economic problems.

The US Federal Reserve – which decided to keep its rates at 0% to 0.25% – has been blamed by some commentators for creating the environment that allowed sub-prime lending to flourish when it dramatically cut rates to 1% following the bursting of the dot-com bubble in 2001.

“Is it lost on everyone that the Fed has moved in this direction twice now in the space of five years?” Carr asks in an opinion piece published in The <Australian Financial Review.

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