Rate cuts are optional
by Peter Switzer
Interest rate cuts will work this year, despite what the so-called experts predict, but I still hope we get another one or two reductions before mid-year.
However, even without cuts I expect the snowball of confidence is building and despite the fact that economic data could be disappointing in the early months of this year, a turnaround will come, though it could be too late for the Gillard Government.
Regular readers know I have used the snowball of confidence analogy to explain why consumers and businesses are not borrowing and spending, and a big part of that has been the negativity coming from the stock market and the global economy.
Let’s make it simple to explain my point. The global financial crisis (GFC) has spooked a lot of people, creating cautious investors and saving consumers. There has been a fear to borrow or to take risks lest another GFC Mk II comes along. The black clouds of huge debt everywhere plus talk of the euro disappearing, Greece exiting the eurozone, the USA falling back into recession and the persistence of a global economic slowdown has frightened the pants off many consumers, businesses and investors.
That’s why rate cuts were pushed hard last year — 125 basis points — but the RBA came to the party late on this and its stance has not helped build confidence. In fact, they look a bit desperate and that also scares some Aussies. Meanwhile the banks have not passed on the full rate cuts, which hasn’t helped the monetary loosening process. Then you throw in the Gillard Government’s problems in Canberra, added to the Treasurer’s desire to create a budget surplus, which takes demand away from the economy, and there’s a hell of lot of reasons why the snowball is growing slowly.
Over 2012, it did get up a head of steam with China and the USA showing that they are growing better than tipped by doomsday merchants. Recently the European Central Bank’s (ECB) Mario Draghi said the eurozone did not need a rate cut as economic and bond market conditions were improved.
Even Japan with its new Prime Minister, Shinzo Abe, will embark on a spend and prosper policy, which should bolster growth in our second most important export customer.
Past policy mistakes here and lingering concerns will produce some negative economic data in Australia in the first half of 2013 but things will pick up in the second half.
Last week, the ECB’s Draghi pointed to a “positive contagion” developing in 2013, which is akin to my snowball of confidence. That’s why I think past rate cuts will work this year and that’s why we won’t need four cuts taking our cash rate to two per cent. If news really gets good, rate cuts could be optional!
Out this week
Over the weekend US stock markets were just up into positive territory but they’re up around three per cent for the first two weeks of this year. The big story this week will be company earnings from the likes of Goldman Sachs, JPMorgan, Citigroup, American Express, Intel, GE and Morgan Stanley. There will be some important economic data with the spotlight on the improving housing sector.
Market-wise the Yanks will focus on whether the S&P 500, now at 1472.05 can make it to the psychologically important 1500-level. Good earnings news will do that.
Locally, there will be data that could easily determine the next rate cut with housing loans, jobs ads, unemployment, new car sales and consumer sentiment all up for show and tell.
They will make very interesting reading for the RBA and the Treasurer, Wayne Swan.
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Published on: Monday, January 14, 2013
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