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Why the RBA SHOULD cut rates

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by Peter Switzer

Well I’ve been talking about an overdue pullback in stocks, and maybe it’s starting now with Europe blamed by the Yanks for the weakness on Wall Street overnight. However, today’s main game is the Reserve Bank’s (RBA) decision on interest rates, and they better cut, though I have my doubts.

Why should they? It’s simple — the economy isn’t doing well enough and that’s why Treasurer Wayne Swan has virtually given up on his budget surplus promise. If you need more proof, just ask yourself why the bright sparks in the ANZ economics team are predicting four interest rate cuts this year, which would take the cash rate down to two per cent.

Even if these economists are only one-quarter right,then we should see one cut this year, and so why wait? Interest rate or monetary policy works with a lag of anything between six months and over a year, so if it’s going to be needed, then give it to us now for Pete’s sake!

Disappointing confidence levels

Sure there are some OK things happening now like the bounce back in the iron price, the recovery of China and the nice rise in the stock market, but business, as well as consumer confidence, are both at disappointing levels. The latter was up by 0.6 per cent in January but has just climbed out of negative territory in the past few months! For eight months of 2012 it was negative.

The NAB business conditions reading is also negative and job ads have slumped for 11 months in a row, off 18.4 per cent over the past year.

The most recent building approvals number was down 4.4 per cent when economists expected a one per cent rise. Admittedly they are up 9.3 per cent over the year but this was off a low base.

In the news

By the way, I’m not arguing things are terrible — they’re not — but our economy is a long way off gangbusters time. Want proof? Well, look at the following:

The Performance of Manufacturing index fell by 4.1 points to 40.2 in January. It was the eleventh month of contraction.
The RP Data – Rismark Home Value Index showed capital city home prices rose by 1.2 per cent in January and are up 1.8 per cent on a year ago, which is a pathetic rise and shows how the housing sector is barely walking, let alone running wildly, despite 175 basis points of rate cuts since November 2011!
The economy-wide spending softened in December. The Commonwealth Bank Business Sales Indicator (BSI) showed spending fell by 1.9 per cent in seasonally adjusted terms in December.
The average credit card balance fell by a record 2.3 per cent over the year to November.

Throw in the fact that the dollar is too high and the inflation rate is right in the middle of the target band, despite the carbon tax, and there’s no good reason not to give our businesses, the potentially unemployed and the wider economy, a break.

Let me assure you there's also good news developing, but I think one more rate cut now might save three more over a year where most economists expect at least one rate cut will be required. So, why wait for the ‘you know what’ to hit the fan?

Around the world

For Wall Street watchers, the Dow lost 129.71 points or 0.93 per cent while the S&P 500 gave up 17.46 points or 1.53 per cent to end at 1495.71.

Factory orders were up 1.8 per cent in December against an expectation of 2.2 per cent, but the spook factor was Europe where the Spanish Prime Minister is embroiled in a corruption scandal and in Italy, the former leader, Silvio Berlusconi is making up ground ahead of the election. Both developments haven't helped bond yields and this hasn't helped stocks. That said, a sell-off after a massive run up on stocks was on the cards, as I have been saying for a week.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Tuesday, February 05, 2013

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