I read this article recently in Australian Broker News that rates are likely to stay stable for the rest of the year, but “panic” could bring about major cuts, an economist has suggested.

With lenders increasingly slashing fixed rates and economic unease growing following the U.S. debt downgrade, AMP chief economist Shane Oliver has told Australian Broker News continued market panic could see some significant moves by the RBA. “The most likely scenario is rates on hold for the time being, but probably a rate cut or rate cuts starting next year in response to slowing inflation. If alternatively, the economy goes into complete meltdown a la GFC, then I think a rate cut would be brought forward. We could be looking at 100bps of cuts if we’re looking at complete panic in the market,” Oliver commented.

Money markets have already priced in rate cuts, a move which has been reflected in the 90 day swap rates falling around 50bps below the official cash rate. While Oliver said this could be a leading indicator for rate cuts, be argued that it is not a perfect predictor. “I think it’s a good indicator, but you’ve got to be a bit careful. There’s a few occasions where the money markets have factored in rate cuts. In the middle of last year, in fact, they factored in rate cuts. Every time there’s a global upset the market has to factor in cuts. It’s not a perfect indicator, but the fact that we are seeing a significant increase in downside risks regarding global growth is pointing in one direction, and that’s towards eventual rate cuts,” he said.

Money markets are currently factoring in 150bps of cuts, bringing the cash rate to 3.25% by mid-2012. Oliver called this “a bit rich”, but said such cuts were possible in the event of a “full-blown economic meltdown”.