Has the Reserve Bank reached the end of the rate-cut road?

The Reserve Bank’s decision yesterday to keep the official cash rate on hold at 2.5% has been greeted as largely unsurprising, but the bigger question remains – have the rate cuts reached their end?

Rates have now been on hold for two consecutive months at the record-low level of 2.5%.

The announcement came yesterday as positive economic news was also received in the form of retail sales numbers, manufacturing data and property prices.

For the first time since June 2011, the Australian Industry Group’s Performance of Manufacturing Index rose above the contraction marker of 50 points to 51.7, indicating growth in the sector.

Retail sales rose 0.4% during August, new home sales rose by 3.4%, and home prices also increased by 1.6% across the country.

These economic indicators are positive, but JP Morgan chief economist Stephen Walters says it’s not time to celebrate yet.

“The latest run of data has been good, but let’s see what the employment figures are,” he says.

“If unemployment increases as expected, this could temper the confidence of business and consumers a bit.”

Walters says the chances of the RBA cutting rates are reduced; however his original forecast of another cut before the end of the year remains the same.

“The recovery from the end of the mining boom is still not going well and you’re going to get a low inflation number on the 23rd of this month,” he says.

“If we get into next year and there are signs of house prices and construction still going up, then they may not move at all. So if there’s a cut, it will be near term rather than next year.”

HIA chief economist Harley Dale also said not to rule out the possibility of another cut.

“We’ve been in this situation before, where it looks as though the Reserve Bank has finished cutting, but that hasn’t turned out to be the case,” he says.

“It’s always been economic outcomes which drive the situation and we’re still looking at a domestic economy where we may not see the necessary rebalancing in the fallout from the mining boom.”

Dale says regardless of whether or not rates are cut, a rise in the interest rate is unlikely until 2015.

“There is some chatter starting to build in some quarters about the rate being on hold for the next six to nine months, but on the balance of what we know at the moment, there is sub-trend economic growth, residential recovery is still well short of where it needs to be and commercial construction won’t fill the void of resources-related projects,” he says.

“It’s hard to see what would warrant a return to higher interest rates next year and I think this would be a dangerous outcome.”

Reserve Bank governor Glenn Stevens said yesterday in a statement global financial conditions remain accommodative.

“The easing in monetary policy since late 2011 has supported interest-sensitive spending and asset values. The effects of these decisions are still coming through and will be for a while yet,” he says.

“The pace of borrowing has remained relatively subdued to date, though recently there have been signs of increased demand for finance by households.”

This article first appeared on SmartCompany.


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