Australia rate cut stuns, markets thirst for more

By Wayne Cole, Leika Kihara and Marc Jones

SYDNEY/TOKYO/FRANKFURT (Reuters) - Australia stunned markets with its steepest interest cut in 16 years on Tuesday sparking belief among that investors that major global central banks could now choreograph a coordinated set of rate cuts.

The Reserve Bank of Australia's 100 basis point reduction was twice as big as expected, underscoring the belief that increasingly strong financial medicine is now needed, as talk about coordinated rate cuts surfaced in Europe.

Only the Bank of Japan bucked the trend, signaling it may not join any campaign of rate cuts to contain the raging crisis which has put the world's financial system in greater peril than at any time since the 1930s Great Depression.

"I think it is important to coordinate in everything," said ECB policy maker and head of the Spanish central bank Miguel Angel Fernandez Ordonez. "Now the problem is global, it is important to coordinate in absolutely everything."

However, he went on to say that any cuts should take account of inflation risks and not be merely a knee-jerk reaction to the ongoing market havoc.

That did nothing to silence the clamor. Influential investor Bill Gross, who runs the world's biggest bond fund, urged the U.S. Federal Reserve to follow Australia's lead and slash rates by a full percentage point now the inflation threat has receded.

"We are experiencing asset deflation and the threat of headline inflation is long past," Gross, chief investment officer of U.S.-based Pacific Investment Management Co., said in a note that called for a "globally coordinated policy rate cut."

Indeed, Citi analysts said the banking crisis, falling asset prices and volatile markets may provide the justification for emergency rate cuts by the European Central Bank (ECB) and the Bank of England (BoE) in coming hours.

"There seems a growing chance of emergency ECB and BoE easing in the next few days, perhaps even today -- especially if the U.S. Fed is also ready to move," they said in a research note.

Australia's bigger-than-expected cut may have effectively fired the starting pistol in a run of rate cuts, suggested Suresh Kumar Ramanathan, head of strategy at CIMB Bank in Kuala Lumpur.

"It looks to me that the RBA's rate cut was no fluke... the rest of the global central banks may have had a teleconference to up the rate cut story. Bottomline, it's a strong signal to the market that unified action will come after all," he said.

"I think rates will happen in a parallel fashion but probably not in a coordinated way," said Tullett Prebon economist Lena Komileva in London.

FED CUT

Investors expect the BoE to cut rates at its policy meeting this week and are pricing in cuts from the Federal Reserve and the ECB.

"Reducing interest rates is no longer excluded," said ECB policy maker Guy Quaden in comments backing up what President Jean-Claude Trichet said last week.