Reserve Bank of Australia monitoring markets, sees no domestic strain

An RBA spokeswoman made the statement as selling swept global share and commodity markets and investors priced in a greater risk the central bank would have to reverse course and cut official interest rates.

"The RBA is monitoring market developments carefully," the spokeswoman said. "With no strains evident in the money market, the RBA market operations continue to be conducted as usual."

The RBA added A$973 million to the banking system on Tuesday morning, well in line with the estimated shortfall of A$964 million, suggesting there was no extra demand by banks for funds.

During the global financial crisis in 2008, the RBA flooded the market with extra cash as banks globally became reluctant to lend to each other.

The RBA actually considered tightening policy last week to head off domestic inflation, but decided to stand pat given acute uncertainty in world markets.

Since then, share and commodity markets have tumbled as fears grew that debt crises in the United States and Europe would spill over into a global recession.

As a result, investors have rushed to price in emergency rate cuts from the RBA. The interbank futures market now implies a cut in the 4.75 pct cash rate this month, which would require an intra-meeting move. The RBA's next scheduled policy meeting is on Sept. 6.

Investors have priced in 72 basis points of easing by the next policy meeting in September and no less than 165 basis points by Christmas.

The shift was encouraged in part by news Commonwealth Bank had cut its fixed rate mortgages by up to 60 basis points, reflecting the huge move down in longer-term market rates in recent weeks.

Copyright Reuters, 2011