Thursday, December 4, 2014

Weak economic growth puts interest rate cut on RBA agenda

So what do those surprisingly weak economic growth numbers which hit yesterday mean for interest rates?

And how worried will the Reserve Bank be that about the ultimate risk of a recession unless it steps in with emergency stimulus?

They're big unanswered questions and why some economists are now changing their forecasts to a interest rate cut in the New Year.

Listen to my analysis from this morning's edition of "AM".

The Reserve Bank has held the cash rate steady at the historic low of 2.5 percent since August last year.

The mantra - repeated on Tuesday when rates were left unchanged - has been about "a period of stability" as the economy adjusts from the fast unwinding mining investment boom.

The RBA has been taking what it sees as the most "prudent" course, despite calls for a rates hike to cool hot property investment in Sydney and Melbourne and the threat of a dangerous "bubble".

That strategy has been backed by third quarter growth slower than the most pessimistic forecasts and that with a collapse in commodity prices after the boom and a slowing in capital spending, Australia is in the midst of an "income recession".

The RBA board takes January off and meets on the first Tuesday of February - and the possibility of a rate cut to stimulate spending and to bring the dollar down is set to be high on the agenda.

The Australian dollar dived when the GDP data hit yesterday and this morning is hovering around 84 US cents on expectations of a rate cut in 2015.

Even before the weak GDP data, Deutsche Bank changed its rates forecast - down half a percentage point in two 25 basis point steps - with unemployment set to rise, inflation under control and no sign yet of a housing bubble.

Late yesterday, Goldman Sachs mirrored that prediction and is tipping the RBA will start cutting rates in March with followup in August taking the cash rate to a fresh historic low of two percent.

That could stoke further housing investment but stemming damage to the broader economy will be the RBA's main aim if the Board decides to blink and cut rates.

And unlike other central banks like the US Federal Reserve and the European Central Bank which have rates near zero, Australia has enough powder dry to press the rate cut button if needed.

The latest retail sales figures for October due this morning could add to concerns about the strength of the economy.

But forecasts are looking bleak just a few weeks before Christmas.

The consensus according to a Reuters survey is showing little or no growth - a rare zero percent outcome - with some economists are tipping a negative result.

That's more evidence that the cautious consumer is becoming a grinch, watching every penny and not spending despite Joe Hockey's call to spend up for Santa.

And a rate cut might just be the medicine or a temporary hit to get Australians spending.