Economists split on next rate cut as businesses lambast RBA for sitting tight

The Reserve Bank may have kept interest rates on hold at 3.25% yesterday, but economists are still expecting the central bank to adjust the official cash rate downward – businesses just may have to wait until next year to see it happen.

The move has been criticised by business groups, especially retailers, which claim the RBA is letting down the economy by refusing to cut rates two months in a row. This is despite the fact the bank itself suggested the world economic outlook is improving.

AMP economist Shane Oliver told SmartCompany this morning the economic situation in Australia warrants a cut – and sooner rather than later.

“I think the case for cutting is really to bolster the economy,” he says. “I think they’re taking slightly more of a wait-and-see approach, but I’m confident that rates need to go lower for standard mortgage and small business rates.”

Oliver says it’s “definitely going to happen”, and has pencilled in a December rate cut.

But others disagree. CommSec economist Craig James, who previously had expected the RBA to cut rates either this month or next, is now expecting a 25 basis cut early next year.

“Is this the final rate cut? Hopefully, yes – that would indicate a better global and domestic economic climate. But we aren’t totally convinced, and are pencilling in the risk of a 25 basis point cut early in 2013.”

“The seeds of an economic upturn have been planted, now we have to wait for green shoots to appear. But it all depends on the confidence levels of businesses and consumers.”

The disappointment among businesses is curious – a rate cut from the RBA would reinforce the idea the economy is still struggling, even after signs of life have emerged among consumers.

As James points out, rate cuts may not be enough to help the economy, especially when consumers may need to be given some stability when it comes to interest rates. “Confidence and expectations will be all-important on whether further cuts are required,” James said.

“The missing ingredient is confidence. Add in the fact that the Aussie dollar remains high, despite an easing in commodity prices, and the Reserve Bank may be forced to consider different strategies.”

Commonwealth Bank economist Michael Blythe also said he expects the RBA to wait until after inflation readings are released in January.

This view hasn’t taken hold among business groups, which have blasted the RBA for refusing to cut rates two months in a row.

The Australian Chamber of Commerce and Industry said in a statement the lack of a rate cut was a “disappointment”, citing its own survey that shows SMEs are struggling.

“ACCI is firmly of the view that another rate cut is needed, given weakness in the mainstream economy and the flow-on impact of ongoing global uncertainty.”

The Australian Retailers’ Association took a darker view, with executive director Russell Zimmerman saying the industry could forget about a “bumper” Christmas.

“The decision will be disappointing to retailers at a time when good sales are essential to get through Christmas and given many retailers rely on the festive season and its lead up to make the bulk of their sales.”

Zimmerman’s harsh assessment comes after retail data showed department stores suffered their biggest quarterly fall in sales in seven years.




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