Australia rate cut stuns markets thirst for more

By Wayne Cole and Leika Kihara

SYDNEY/TOKYO (Reuters) - Australia stunned markets with its steepest interest cut in 16 years on Tuesday and investors expected that other central banks would follow suit in a coordinated move to combat the global credit crisis.

The Bank of Japan, alone among the biggest central banks, signalled it may not join a campaign of rate cuts to contain a crisis that has put the world's financial system in greater peril than at any time since the 1930s Great Depression.

That did nothing to silence the clamour. 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.

The Reserve Bank of Australia's 100 basis point reduction was twice as big as expected, underscoring the increasingly strong medicine needed to jolt the world's financial markets back to health.

"It looks to me that the RBA's rate cut was no fluke," said Suresh Kumar Ramanathan, head of strategy at CIMB Bank in Kuala Lumpur.