* Retail sales rise 0.7 pct in Oct, beating forecasts
* Current account deficit shrinks to five-year low
* RBA still expected to cut rates by at least 75 basis points
By Wayne Cole
SYDNEY, Dec 2 (Reuters) - Australia's retail sales staged a surprising bounce in October even in the teeth of global market chaos, but so grim was the outlook abroad that investors still counted on a sharp cut in interest rates later on Tuesday. The Reserve Bank of Australia (RBA) holds its monthly policy meeting on Tuesday and is considered almost certain to cut its 5.25 percent cash rate by at least 75 basis points to a five-year low.
Indeed, investors were eagerly pricing in a full percentage point, following a new slide in share prices and miserable economic news from around the globe.
"If anything, the latest data around the world argues for the RBA to be even more bold and go by 100 basis points today," said Brian Redican, a senior economist at Macquarie. The central bank has already eased by 2 percentage points since September, by far the most aggressive reduction since the recession of the early 1990s.
The rate announcement is due at 2:30 p.m. (0330 GMT) along with a brief statement of the RBA's reasoning which is sure to highlight the perilous state of the world economy and leave the door wide open for further easing.
"The economy is poised on a knife edge here and the RBA is going to keep cutting until it starts to get traction with consumers and housing," said Redican.
Nor was the RBA alone: the European Central Bank, the Bank of England and the Reserve Bank of New Zealand are all expected to cut rates this week in a global effort to revive growth.
On the face of it, the 0.7 percent rise in retail sales reported for October seemed like good news as it easily topped forecasts for a 0.4 percent fall.
But the reliability of this series had been questioned because of a sharp cut in the size of the survey, leading many analysts to discount the result.
"The data is still compromised and we shouldn't read too much into it," argued Su-Lin Ong, a senior economist at RBC Capital Markets. It won't change what the central bank will do. It is clear they are front-loading the cuts to boost the economy."
NEAR ZERO
The economy needs all the help it can get.
Figures on gross domestic product out on Wednesday are expected to show the economy grew a paltry 0.2 percent in the third quarter, with some risk of an outright contraction.
Government data out on Tuesday showed the country's trade balance likely subtracted around 0.4 percentage points from economic growth last quarter, twice what analysts had expected.
That was only partially balanced by a solid 1.3 percent rise in government spending in the third quarter.
The country's current account deficit did shrink by more than expected to a five-year low of A$9.47 billion ($6.1 billion). Yet, much of the improvement was due to past price increases for coal and iron ore, which would not be repeated given the recent slump in global commodity prices.
Scott Haslem, chief economist at UBS, still expects a rise of 0.2 percent in GDP for the third quarter, but adds: "Clearly, when you are forecasting something as close to zero as this, one cannot rule out a negative print."
He looks for a sharp but short downturn in growth into the first half of 2009, followed by a gradual pick up as monetary and fiscal stimulus feed through.
Policy makers are pulling out the stops to support growth. As well as the biggest cuts in borrowing costs since the 1990/91 recession, the Labor government has weighed in with a A$10.4 billion stimulus package, much of which hits wallets next week. ($1=A$1.56) (Editing by Jan Dahinten)