Australian investors react positively to US rate cut.
Australian shares climbed steeply following the US Federal Reserve Bank announcement that it was cutting the key short term interest rate by 50 basis points.
The S&P/ASX 200 Index rose 1.36 per cent on opening and was 2.6 per cent higher by the close of trading.
At the Tuesday meeting of the US Federal Reserve Bank's (Fed), Federal Open Market Committee (FOMC), it was unanimously agreed to cut the Fed Funds rate by 50 basis points to 4.75 per cent, drop the discount rate down another 50 basis points to 5.25 per cent.
The FOMC said the action was "intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time."
The Fed also cited the potential for the credit crunch to intensify the housing correction, and "to restrain growth more generally".
It said the cut "is intended to help forestall some of the adverse effect on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time."
ICAP senior economist Matthew Johnson said tough talk on inflation could prevent the market from cutting rates further.
"However, I doubt that this ploy will work, or retain its substance. The simple fact is that slower growth will take care of inflation pressures, and therefore assuming that the Fed is right about slower growth, then I think that the inflation problem will evaporate over the coming months."
According to Johnson a more pro-active Fed means that there's less chance of a spill over to Asia, which means less chance of the RBA having to cut rates.
"However the flip side is that the widening rates spread will see the Australian dollar higher, which effectively tightens monetary conditions," he said.
"At this point, I don't expect that the RBA will touch rates again."
RMIT University School of Economics, Finance and Marketing, Professor Richard Heaney agrees.
"I'd be very surprised if they upped the ante again," he said.
"The key thing to me is that the Australian economy should be pretty well immunised from the US, mainly because we don't have the same sort of exposures particularly to these low doc, sub-prime mortgage securities."
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