RBA should cut interest rates to avoid recession

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The Federal Opposition and a top economist have urged the Reserve Bank to cut the interest rate by at least 0.25 percentage points to avoid recession.

Dr Shane Oliver said the RBA is risking joining Europe in falling ‘behind the curve’ by failing to act even as European and US debt worries have sent share markets tumbling last week.

Andrew Robb, the Opposition finance spokesman, also called for a cut in interest rates. Future Fund Chairman, David Murray, also said fiscal settings were wrong. “This is not a time when state and federal government should be becoming more highly indebted, and they are,” he told.

Experts are calling on G20 leaders meeting in Washington to detail a structural action plan to give certainty to Greece and southern European economies, as speculation mounted that EU leaders were trying to assemble a $2 trillion bailout.

Dr Oliver, AMP Capital’s chief economist, said home sales and retail spending were ‘comatose’. Recession, not inflation, was the concern. “Interest rates have to come down or we risk getting into a downward spiral where falling confidence leads to reduced spending, which leads to higher unemployment. It’s now starting to happen.”

The RBA should cut the cash interest rate from 4.75 to 4.5 per cent at its October meeting.

Mr Robb said the Australian Government should reduce spending to take pressure off interest rates. But he also urged the Reserve Bank to act.