Surprise rate cut extends stocks rally

The surprise 50-basis-point cut, which took the official rate to 3.75 per cent, the lowest since early 2010, helped to extend a six-week rally on the S&P/ASX 200 Index, which has climbed

7.2 per cent, or 302 points.

The Australian dollar was an early casualty, quickly dropping from US104? to US103.2? on the news, and the yield on the 10-year government bond fell to its lowest in 60 years.

The S&P/ASX 200 Index closed up 32.9 points, or

0.7 per cent, at 4429.5.

Economists said the central bank was now clearly pursuing higher inflation, and that the surprise rate cut was likely to be followed by another one in coming months.

"Having cut rates so aggressively, the RBA is clearly targeting growth and if the data flow remains weak, another cut will happen," said National Australia Bank chief economist Alan Oster. "June is a possibility."

It's a very different situation from that in the

US, where Nobel Prize-winning economist Paul Krugman slammed members of the US Federal Reserve board yesterday for refusing to generate more inflation as a means of increasing employment.

In the past year, annual inflation in the US has been at roughly 2.7 per cent.

Mr Krugman said that, with millions of Americans out of work, US policymakers should tolerate inflation of

3 to 4 per cent to kick the economy to life.

"We have had a massive failure of our political system that has come to accept that 8 per cent unemployment is the new normal and there is nothing that can be done," he said. "We're in a low-key version of the Great Depression."

Back in Australia, Bank of Queensland appeared to be the first bank out of the blocks to pass on some of the RBA's rate cut, promising to lower its standard variable home loan rate by 35 basis points to

7.11 per cent, from May 11.

For the next couple of weeks all eyes will now be on the big four banks to see how they will respond.

"We expect ANZ's decision will be made first this Friday, announcing around 40 basis points [worth] of cuts," said Annette Beacher, head of Asia-Pacific Research at TD Securities.

"The other banks are expected to pass on

around 35 basis points,

citing elevated funding costs."

Shares in Woodside Petroleum were up $1.28 at $36.20 after it sealed a

$2 billion deal to sell part of its stake in the proposed Browse LNG Development to Japan Australia LNG.