Blog
Could we see Interest Rates fall in coming months?
2011 July 20
by Peter Switzer
Could it be true? More and more so-called experts are raising the proposition that the next move in interest rates will be – wait for it – down. Over the past few weeks, the money market mob who use futures products to punt on upcoming changes to interest rates have been changing their odds quicker than a bookie at Flemington on Cup Day. When the Greek debt debacle was threatening a potential PIIGS contagion, where the desperate, debtor countries of Portugal, Ireland, Italy and Spain could be infected with the Greek default disease, there was talk of a 70 per cent and even a 90 per cent chance of a rate cut by year’s end. Don’t wish for rate cut This is wild talk and could only happen if the EU debt problem looks unstoppable. At this stage, it looks manageable and so a rate cut still looks unlikely. However, if a surprise development happens and international banks start doubting each other, then rates would fall in Australia – no doubt.
But don’t wish for this kind of disaster as you could lose your job, your business could go broke and it does not bear dreaming about simply for a rate cut. Now this is coming from a guy who regular readers will know has been bagging the Reserve Bank for raising rates too far and too fast for nearly two years. I got really hot under the collar after the November rate rise on Cup Day and that was the last we have had. And since then the Oz economy has nosedived and while I won’t blame this on that rate rise, it was a contributing ‘straw’ that just might have broken the back of the non-mining part of the economy. Data watch To put balance into this story, the reality is that the RBA assistant governor Philip Lowe, speaking in Adelaide not long ago was still beating the central bank’s drum that interest rates would have to rise at some point over the coming months. That’s why I can’t see a rate cut in the absence of a credit crunch for banking systems overseas. Phil and his mates are still petrified about inflation and that’s the big watch for all interest rate worriers out there.
The next Consumer Price Index reading is at the end of this month and if it’s on the high side, the RBA will get ready for another lift. However, if it’s a benign result, they will sit back on their hands. SME confidence low One thing is for certain – the RBA and its board are a bit surprised about the softness of the economy. The triple whammy of the floods, the rate rises and the high dollar have cut into the momentum of many businesses and it doesn’t look like it’s getting better. The recent Sensis Business Index, which is a good small and medium enterprise health thermometer was crook – really crook! “Weak consumer spending and an uncertain economic outlook have caused business confidence in Australia to tumble to a low not seen since the GFC and the introduction of the GST,” said Christena Singh, who oversees the survey. Just to make this even clearer on the off-chance a RBA board member reads this column but has missed this survey, note the following: “This is one of the largest quarterly falls in business confidence we have seen in the 18-year history of the report”. RBA’s changing view But wait, there are other worrying indicators that scream out that maybe the tough talk of rate rises has been overdone and so last week, the RBA turned a tad dovish putting out this observation that economic growth “is now unlikely to be as strong as earlier forecast”. Better late than never and this new view could help to repair the damage.
I suspect the talk of rate rises had a role to play in the unnecessary softness of the economy and SMEs aren’t optimistic about the future. “Overall, small businesses believe the economy is currently slowing and that it will have deteriorated in a year’s time,” Singh said. “This is the first time in a year we have seen perceptions of the economy trend into negative territory.” By the way, the RBA’s new less Bolshy attitude on rate rises was formed before the latest Sensis survey. Throw in recent weak car sales, the 0.6 per cent fall in retail spending in May, the fall in the TD Securities inflation gauge, the 2.7 per cent drop in house prices this year nationally and the fact that loans for housing are at the weakest level in 34 years and the RBA would have to be an economic wrecker to even think about a rate rise now. That said, I cannot see these guys cutting rates yet despite the case for it getting stronger by the day.
