Eric Johnston and Clancy Yeates    May 2, 2012

AUSTRALIAN shares surged closer to the critical 4500-point level as the Reserve Bank attempted to jump-start the sagging economy.

Fallout from the bigger than expected 50-basis-point cut was felt through markets as almost US1¢ was carved from the Australian dollar in the immediate aftermath and long-term government borrowing costs fell to their lowest in more than 60 years.

Investors are betting on further cuts in official interest rates, after the Reserve Bank’s surprise decision to issue its biggest cash rate cut since February 2009.

Analysts said the size of the cut suggested the RBA was looking to provide a positive ”shock” to consumer and business confidence.

The benchmark S&P/ASX 200 Index was up 32.9 points, or 0.75 per cent, at 4429.5 points, defying a soft lead from overseas.

Futures markets were last night pricing in a 75 per cent chance of another rate cut next month, and a further reduction in the cash rate to a low of 3 per cent by November, compared with yesterday’s new rate of 3.75 per cent.

The dollar – which governor Glenn Stevens noted in his statement was still high despite weaker export prices – was last night trading at US103.24¢, down from US104.33¢ earlier in the day.

Australia’s 10-year bond futures contract rallied to a record high of 96.530, giving it an implied yield of 3.470 per cent – the lowest in more than six decades.

With the big banks staying tight-lipped on how much of yesterday’s reduction they will pass on to customers, analysts expect mortgage holders to receive less than the official reduction, and they say this will trigger more cuts by the central bank.

Because of higher bank funding costs, ANZ economist Ivan Colhoun said yesterday’s cut should be interpreted as a cut in actual lending rates of about 0.3 of a percentage point.

With next week’s budget expected to announce deep cuts to spending to achieve a surplus, they said a further cut in June or July was likely.

”Our expectation is that a 50-basis-point cut in lending rates compared to after the December easing is appropriate in the current environment, especially as fiscal policy will be tightened by the government in next week’s budget. Hence a further 25-basis-point cut is likely in June or July,” they wrote.

Economists at Westpac, Commonwealth Bank and NAB also predicted a further rate cut of at least 25 basis points in coming months.

However, more bullish analysts played down the chances of further reductions.

HSBC chief economist Paul Bloxham said rates were now at an ”expansionary” level and the labour market appeared to be steadying. ”Having cut by 50 basis points, the RBA now seems likely to stay on hold for a while,” he said.

Speaking before the RBA decision, Commonwealth Bank chief executive Ian Narev cautioned that global markets were likely to remain volatile for some time as Europe’s economic problems continued to cast a shadow.

But he remained confident about Australia’s long-term prospects. ”The reality [is] that … Europe is in an endemically low-growth mode for years,” he said. ”That means that the environment is going to be more difficult to navigate but we think Australia is a good place to be in, but on the margins we’ve got to remain conservative.”

Official figures released yesterday showed house prices continued to cool, falling by 1.1 per cent in the March quarter. This marked the fifth consecutive quarterly decline, with the annual fall at 4.5 per cent in the year to March 31.

Read more: http://www.watoday.com.au/business/markets-surge-after-rate-cut-20120501-1xx4q.html#ixzz1trSuYtg6