Leading economists agree: Expect another rate cut this afternoon
Tuesday, August 6, 2013/
The nation’s leading economists are in complete agreement: The Reserve Bank will cut rates this afternoon.
With weak economic data continually being released, including yesterday’s disappointing retail sales data, economists say the cut will be needed to jumpstart the economy.
Such a cut will be controversial – it would come soon after the start of an election campaign.
NAB chief economist Alan Oster told SmartCompany there will be a 25 basis point cut.
“Everybody is expecting that. We have a combination of an economy that is still growing but is grinding slower. We predict the economic growth rate will be even lower than the government said on Friday,” he says.
Late last week, Federal Treasurer Chris Bowen said Australia’s real GDP growth is now expected to be 2.5% in 2013-2014, but he predicted it would strengthen to 3% in 2014-2015.
In terms of unemployment, one of the strongest indicators of Australia’s economic health, Bowen said it would increase to 6.25% in 2013-2014, but Oster said it would climb even higher.
“When you’ve got an environment like this, there is very little risk in cutting rates, but I’m not sure it’s going to work all that well,” he says.
“In businesses outside of mining, which is where you want to see the improvements, there has been very little change.
“People are scared and they don’t really want to borrow, so a rate cut might not address this issue,” he says.
Should the RBA trim rates by the predicted 25 basis points, the official cash rate would change from 2.75% to 2.5%.
Yesterday, Australian Bureau of Statistics retail trade figures revealed turnover for June remained flat. The data is a key figure in influencing the RBA’s decision.
JP Morgan chief economist Stephen Walters told SmartCompany the primary reason for the likely cut is the failure of another economic sector to pick up now the mining boom is fading.
“Retail sales are very weak, unemployment is drifting upwards and there has been very little lift in the non-mining investment space. The RBA also want the currency to go down and if they don’t cut today it will go up,” he says.
Walters says the Reserve Bank’s policy of cutting rates “will invariably work”, since if the cost of capital is low enough, there will eventually be a lift in investment outside of mining.
“We’re already seeing it in the housing market, which is picking up, and the export market is growing too. There are some sectors of the economy that are doing well, it’s just not uniform across the other sectors of the economy and that’s what they want to see,” he says.
HIA chief economist Harley dale told SmartCompany RBA governor Glenn Stevens has indicated in the past few weeks a cut is probable.
“It’s probably the most clear interest rate outcome we’re likely to have had all year.”
“The evidence is quite compelling, the pulse of economic activity has slowed and there have been some weaker than expected partial economic indicators,” he says.
Stevens criticised the government last week for inconsistent economic policies, saying monetary policy must reflect the pressures being felt economically in Australia.
“We have been saying recently the inflation outlook may afford some scope to easy policy further if needed to support demand.
“The recent inflation data do not appear to have shifted that assessment,” he said.
But despite the vast majority of analysts predicting a change will occur, AMP Capital Investors chief economist Shane Oliver told SmartCompany there are no guarantees.
“The probability of no change is probably greater than 3%, which the market is predicting. The RBA does like to surprise sometimes.
“The only fly in the ointment is the election has now been called, and they may prefer to not change rates during an election campaign. However, they are aware that if they don’t cut this week, the same logic would be applied to next month, so they’d have to wait until October and that’s a long time when there is scope to cut,” he says