The Big Picture: Reluctant RBA still has room to cut rates

At the start of the year we penned the following to represent our interest rate views:

“Confidence is a key issue. If global risks recede then consumers and businesses will become more confident to invest, employ and spend. But it will take a few months for the Reserve Bank to be confident enough that this is occurring. In the first half of the 2013 the RBA may want to ‘top up’ the stimulus – especially with inflation contained and borrowing weak. But if the global and domestic economies become more settled and growth rates lift, then attention will turn to lifting rates late in 2013. A likely range for cash rates in 2013 is 2.75-3.50%.”

And six weeks into the year, with the first Reserve Bank Board meeting behind us, we see no reason to change our view.

If new problems crop up on the global stage or our domestic economy loses momentum, then the Reserve Bank could cut rates one last time.

We don’t believe the Reserve Bank wants to cut, but the option is there, especially with inflation under control. But unemployment is not a major consideration. It is always important to remember that monetary policy is forward looking. The employment data is very much backward looking, reflecting decisions made five or six months ago and much has changed over that time.

If the hurdles are cleared over the next few months then the Reserve Bank will shift from an “easing bias” to a “neutral stance” – where rates could move either way. And the further we go without a major new negative development or catastrophe, the more likely that the Reserve Bank will start thinking about lifting rates.

Strangely, when we made our interest rate views known early this year, they were the focus of derision by some, but now the views are considered much more mainstream. As always, much can change in a short space of time, so it is important to stay alert to new trends.

The week ahead

A relatively quiet week is in prospect for domestic and US economic data. In Australia, lending and sentiment figures dominate. In the US, a number of “top shelf’ indicators are scheduled for release, including retail sales and production.

In Australia, the week kicks off with housing finance data. Home buyers and investors are still reluctant to take on new debt according to data from the Australian Bankers Association (ABA). On the basis of the ABA data, we expect that the value of loans fell by 2.5% in December after a 0.6% gain in November.

On Tuesday, the National Australia Bank business survey for January is issued together with Reserve Bank data on credit and debit card lending figures. Business confidence lifted in December, and on the basis of improved global economic data and higher domestic share and home prices, there are good reasons to expect that confidence improved again in January.

The Reserve Bank data likely showed that credit card lending remained out of favour in December with consumers electing to pay for purchases with their own funds (debit cards).

On Wednesday, Westpac and the Melbourne Institute release the February consumer sentiment index data. However, the weekly Roy Morgan survey shows that confidence has been zig-zagging sideways since mid-January, but on balance it is down by over 4%. The date of the federal election certainly hasn’t lifted consumer confidence levels.

Also on Wednesday, the ABS issues the latest lending figures – the most comprehensive figures on lending in the economy including housing, personal, commercial and lease loans. Consumers and businesses are still more inclined to cut debt levels than take on new debt.

And on Thursday, the ABS releases detailed employment data covering regional and demographic groups.

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