Single rate cut may be enough
David Uren, Economics correspondent | September 02, 2008
TODAY'S expected interest rate cut may be the last for some time, with the best business profits in five years and rapidly rising returns from the resources boom showing the economy is in much better shape than the Reserve Bank thought possible as recently as three weeks ago.
The Reserve board is almost locked into a decision to cut the official rate by 0.25 percentage points today, following public comments from senior bank officials declaring the inflation threat had eased, and the minutes of the last meeting warning of a deepening downturn unless rates were lowered.
Kevin Rudd yesterday claimed credit for creating the conditions for the rate cut, which would be the first since December 2001.
"If you are able to bring into balance your fiscal policy with your monetary policy, and you ensure you have got the right settings overall, you make the job of the Reserve Bank easier in terms of bringing interest rates down over time," the Prime Minister said.
A quarter of a point cut would lower the official rate to 7 per cent and standard mortgage rates to about 9.35 per cent, shaving $54 from the monthly cost of servicing a standard $300,000 mortgage.
Brendan Nelson said the state of the economy was so serious the Reserve Bank should double the expected rate cut to 0.5 basis points.
"We're now in an environment where clearly our economy, while it has strong fundamentals, is slowing very sharply. Australians are paying for that with their jobs," the Opposition Leader said.
The latest official figures show no signs of a downturn. Pre-tax profits, which showed little growth in the first nine months of the financial year, leaped ahead in the June quarter, rising by 22 per cent. The biggest contributor to the gain was the windfall profits of the big iron ore and coal miners, which raised mining profits by 33 per cent.
Profits were strong in other sectors: manufacturing up 17.3 per cent, construction up 21.8 per cent, retail trade up 17 per cent and business services up almost 40 per cent.
The ANZ's head of Australian economics, Warren Hogan, said the profit figures, coming after the forecasts last week for a 33 per cent surge in business investment this year, revealed the economy was in much better health than the financial markets believed.
He noted the financial markets were still expecting today's interest rate cut to be followed by a further two cuts this year, and another two or three rate cuts in 2009. "With inflation over 4 per cent, and growth not likely to be lower than 3 per cent, financial conditions are going to have to remain reasonably tight over the next six to 12 months," Mr Hogan said. "This means the market's expectation of 100 to 150 basis points of rate cuts is going to be disappointed."
Cash is pouring through the economy from the resources boom, which resulted in Australia's first quarterly trade surplus since 2002.
The $559 million surplus in the June quarter contrasted with a record $7.3 billion deficit in the March quarter, and was the result of new contracts for coal and iron ore exports.
The Reserve Bank's index of commodity prices, released yesterday, shows a 7 per cent increase in August, following a 3.3per cent lift in July, with rising prices for coking and thermal coal offsetting falls in gold, copper and aluminium.
The strength of the business sector has surprised the Reserve Bank as well as financial markets.
The bank's quarterly review of the economy, released three weeks ago, said that although mining would remain strong, "slower growth in domestic demand and continuing cost pressures, particularly high oil prices, may dampen growth in non-mining profits".
The bank expected strong forecasts for business investment in the March survey would be revised down in June, instead of which they rose sharply.
The quarterly survey suggested the bank did not expect an early boost to the economy from the terms of trade, saying its "stimulatory effects will take some time to feed through to the broader economy".
The Reserve Bank places heavy weight on the feedback from its business liaison program, and also uses the National Australia Bank's survey.
Both have highlighted a collapse in business confidence and weakening trading conditions, particularly in the June quarter, which are at odds with the official results.
http://www.theaustralian.news.com.au...74-643,00.html