Chances of rate cut fall

The market’s expectations of another rate cut in early March have fallen. Reserve Bank (RBA) Governor Glenn Stevens gave a reasonably upbeat presentation to the parliamentary economic committee on Friday last week. Analysts have since lowered the chance of another cut after Stevens highlighted that there was no reason for any downturn in Australia to be a deep one.

In his speech, Stevens said: "There are reasonable grounds at this stage to think that the Australian economy will come through this very difficult episode – certainly not unscathed, but well placed to benefit from a renewed expansion. Things will be difficult over the next year. But as I have said before, the long-run prospects for Australia have not deteriorated by as much as we may all be feeling just now.

"China’s emergence, for example, has not finished. It has years to run and Australia will benefit from it. We should not lose sight of that or other positives. We can have confidence in our long-run future and in our demonstrated ability to adapt to changing circumstances."

With the official cash rate at just 3.25 per cent, it looks like Stevens is flagging that we’re at the end of the interest rate cutting cycle. The key question is how long the downturn will last.

The RBA’s task is to continue watching the deterioration of the global economy and its effect on Australia. The data looks mixed at the moment with business confidence still looking shaky and the employment market looking grim. For example, the Department of Employment, Education and Workplace Relations skilled vacancies index fell by 11 per cent, its lowest level in 25 years.

On the other hand, the strength of construction activity during the December quarter in Australia surprised the market this week. According to the Australian Bureau of Statistics total construction work carried out was valued at $35.4 billion, which is up 1.7 per cent in volume terms, seasonally adjusted. The market was braced for a drop of about 2.7 per cent.

This data is good news for the economy as it suggests that Australia may be shielded to some extent from the global recession hitting Europe, the United States and China. The issue is that if the economy starts to seriously falter, the RBA will have to make more cuts. Some analysts are predicting that protracted recessionary conditions could push rates down to as low as 2 per cent.

The RBA board next meets on Tuesday 3 March.

Infochoice.com.au