Interest rate cuts are on the cards at last

RELIEF for struggling mortgage holders is on its way, with markets now 100 per cent certain that the Reserve Bank will begin cutting interest rates next month.
By · 8 Jun 2008
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8 Jun 2008
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RELIEF for struggling mortgage holders is on its way, with markets now 100 per cent certain that the Reserve Bank will begin cutting interest rates next month.

Although the Reserve Bank board left rates on hold yesterday, the Reserve Bank governor, Glenn Stevens, signalled a dramatic about-face in the RBA board's thinking on the strength of the Australian economy.

Mr Stevens said there were clear signs that the economy was cooling, and pointed to "subdued" consumer spending, a "softening" in business activity, and "early signs" of an easing in the jobs market.

"On balance … it is looking more likely that demand will remain subdued, and economic growth will be fairly slow over the period ahead," he said.

Having inflicted 12 consecutive interest rate rises over six years, the longest tightening cycle on record, Mr Stevens uttered the words mortgage holders have been waiting to hear and indicated that the RBA board was now considering rate cuts. "With demand slowing, the board's view is that scope to move towards a less restrictive stance on monetary policy in the period ahead is increasing," he said.

Most economists now expect the board to decide on a rate cut at its next meeting, on September 2. The only cause for disagreement is the magnitude of the likely cut.

"An RBA cut in September now is a given," an economist at Macquarie Bank, Rory Robertson, said. "The only question is whether it's 25 basis points or 50 basis points." Mr Robertson said he expected rates to fall by between 1 and 1.5 per cent in the coming year.

But an economist at ANZ, Warren Hogan, was more reluctant to call rate cuts and said the Reserve would be cautious.

"Given that they want to cushion the slowdown in activity rather than stimulate an upswing, the RBA will be cautious and start the easing cycle with a 25 basis point move."

Markets are pricing a string of rate cuts, beginning next month, with two more 25 basis point cuts in the coming year. But it remains to be seen whether commercial banks will pass on any reduction in the Reserve's official cash rate.

Mr Stevens made a pointed reference in his statement yesterday to the fact that unofficial interest rate rises by the commercial banks had contributed to the tightness of economic conditions.

He also noted that pressures on credit markets - cited by banks as the reason for their higher rates - remained.

"Conditions in international markets remain difficult, with heightened concerns over credit persisting," he said.

Job figures data due out tomorrow and an index of wages due out later this month are seen as the only events that could change predictions of a rate cut in September.

Mr Stevens said the boost in Australia's terms of trade continued to present an inflationary risk, but higher oil prices were a new proviso, working to dampen growth in a number of countries.

There was a subtle shift in wording from the governor's statement last month.

Mr Stevens said yesterday the tightening in financial conditions "has restrained" domestic demand, rather than "is working" to restrain.

The Reserve will provide further clues next Monday when it releases its quarterly Statement On Monetary Policy.

Mr Stevens said yesterday the bank's forecast remained for inflation to fall below 3 per cent in 2010.

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