RBA will almost certainly cut cash rate, but economy may be stronger than it thinks

Peter Martin, arguably the top economics journalist in Australia, appears to have been briefed by an RBA insider that the Bank will cut the cash rate next week to 2 per cent, a record low, and I’ve little doubt this will occur (see Reserve Bank to cut interest rates in May in face of weak economy). With inflation and expectations of future inflation very low, super low interest rates globally, a need to keep the exchange rate down, and concerns over the economic outlook, it makes sense to cut the cash rate.

That said, the economy may well be stronger than the Bank thinks, as the wealth effect from strong property markets, particularly in Sydney and Melbourne, appears to be partly offsetting the negative shock from the end of the mining boom. This at least seems the case based on Wesfarmers’s encouraging (though not spectacular) recent retail sales report (see SMH coverage and the chart below). The miracle run of the Australian economy – 24 years since a recession – may continue for some time yet.

Wesfarmers

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6 Responses to RBA will almost certainly cut cash rate, but economy may be stronger than it thinks

  1. KT says:

    Gene, it will be an interesting meeting next week – most commentators thought last month the RBA would cut but they didnt. having said that most think next week it will go down see this http://www.asx.com.au/prices/targetratetracker.htm

  2. Jim says:

    Gene

    Good post, although I’m always a bit cynical about the “wealth effect” from property markets making a big difference to underlying economic growth. Additional capital held in housing just means there is less capital available for investing in productive pursuits that actually create economic activity and jobs.

    The Westfarmers figures are interesting. Big growth in sales, but I wonder if the figures are really just reflecting a shift in their market share? Even their own figures show a bit of that (Kmart cannibalising some of the market share of Target).

  3. Alistair says:

    My suspicion is the economy is worse than it appears, especially on a per capita basis. Partial indicators of economic activity are always up and down, but I can’t see where the major drivers of Australia’s economy will be in the near future. Who’s investing? There must surely be a limit to house prices, even in Sydney. When Sydney house price growth eases then the consumption induced effect will ease off too. Mining investment has fallen, and may fall further. Also small businesses (which may be a bellwether for the economy overall) are “pulling their heads in” according to Alexandra Cain in the SMH, and I suspect she does talk with many small businesses about their current business conditions (http://www.smh.com.au/small-business/trends/the-big-idea/redundancies-are-ridiculous-20150416-1mgj60.html)

    • Gene Tunny says:

      Thanks for the comment, Alistair. The Chinese are certainly investing a lot in Australian property, as are many Australians. I hadn’t seen that SMH article, so I’ll have a read. Cheers.

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