Rates - the case for a cut

The general consensus is for no change today on rates.

But there are good reasons the Reserve Bank should act quickly to give the economy another adrenalin shot rather than wait for another few months. And they all revolve around China and our need to reduce dependence on resource exports.

It is becoming clearer by the day that China’s economic growth will struggle to meet its projected target of 7.5% this year.

That is despite the opaque methodology of measuring Chinese economic growth – the Party sets the targets and then delivers the requisite numbers to back up its projections with pinpoint accuracy.

Credibility aside, there are enough warning signs that things are not as they should be in the economic miracle that is the Middle Kingdom.

Official concerns about the country’s shadow banking industry, most visibly displayed by the spike in interbank rates last week, highlighted for the first time the growing pains that have emerged in the world’s second biggest economy.

But perhaps the greatest indicator that growth will slow was President Xi Jinping’s speech over the weekend to the Party faithful that the nation needed to shed its obsession with GDP growth and, depending on your interpretation, either focus more on society and the environment or return to Marxist principles.

Xi essentially has provided the nation with an official reason not to meet its own targets.

None of this bodes well for Australia, at least in the short term.  The expected smooth transition from a resources investment boom based economy back to a more diversified earnings based now is likely to be anything but.

While resource export volumes will be far greater longer term, as a result of the investment boom, and at higher prices than a decade ago, manufacturing and service industries such as tourism that have been stifled by the strength of the Australian dollar will be required to fill the breach quicker than expected as the “smooth transition” scenario dims.

On the positive side, evidence already has emerged that Australian manufacturing has begun to spring back to life. Figures yesterday showed that, after two years of contraction, Australian PMI numbers almost breached 50, the point where it once again is in growth phase.

Inflation is in check. The housing market is recovering but at a modest and uneven pace across the nation.  There is nothing that should restrain the RBA from a cut today, apart from its own hesitancy. An easing bias is fine. But a rate cut is what is required.

The leadership spill last week only adds to the RBA's unwillingness to cut. With political uncertainty high and the election date unknown, the RBA is less likely to make further changes to monetary policy unless urgently required.