Official interest rates are expected to be slashed by another 75 basis points on Tuesday, after a fall in a key inflation measure gave policy makers the green light to act aggressively.
All 18 economists surveyed by AAP expect the Reserve Bank of Australia (RBA) to cut interest rates on Tuesday and 12 are tipping a reduction of 75 basis points after the central bank's monthly board meeting, up from 11 on Friday.
This would take the overnight cash interest rate, now at 5.25 per cent, to 4.5 per cent for the first time since June 2002.
However, five of the economists polled expect an even bigger 100 basis point rate cut in December, in line with debt futures market pricing.
The cash rate has not fallen below 4.25 per cent in the 19-year era of the RBA publishing a target interest rate.
JPMorgan economist Helen Kevans, who is a tipping a 75 basis point rate cut this month, said the RBA was worried about banking sector instability and weak consumer confidence.
"Previously, we had expected only a 50 basis point move but we think the RBA will move more aggressively, with the near-term imperative to ensure the policy stance is appropriate to deal with increased risk of global deflation, renewed instability in the banking system, and plunging confidence," she said.
"A 100 basis point move does carry a risk, however."
TD Securities senior strategist Joshua Williamson said falling inflation would make the RBA more inclined to slash interest rates by 100 basis points on Tuesday.
"The substantial turnaround in inflation fundamentally changes the economic and policy outlook," he said.
The TD-Securities-Melbourne Institute inflation gauge released on Monday showed a fall of 0.6 per cent in the month of November, the biggest monthly drop since the series began in August 2002.
The inflation gauge recorded an annual growth pace of three per cent in November, down from October's 3.9 per cent level.
More interest rate cuts are expected in the March and June quarters in 2009, with even the most conservative economists polled by AAP expecting a four per cent cash rate by the middle of next year, which would take rates to the lowest level since October 1972.
Four economists see the cash rate hitting three per cent, or lower, in the June quarter, the lowest rate since March 1960.
Commonwealth Bank of Australia senior economist Michael Workman said the RBA would cut rates by 75 basis points next month to stem a slowdown in spending.
"The lending data is quite weak and is implying a significant slowing in the credit growth rate," he said.
"That usually means nominal spending in the economy will be weak."
Repayments on an average $250,000 home loan would fall by seven per cent to $1,662 a month, from $1,790, if lenders reduced their standard variable mortgage rates by 75 basis points in December, in line with an RBA move.
