Rate-cut chance at 50-50

A quarter percentage point cut to official interest rates today remains a distinct possibility after the release of more gloomy economic indicators over recent days.

However, renewed downward pressure on the Australian dollar, the Federal Government’s decision to increase public spending (by cutting the fuel excise), and the fact that US interest rates have not been cut again may be enough to see the RBA hold off this month.

The Reserve Bank is trying to get a feel for just how fast the economy is slowing and while falls in job advertisements, capital expenditure and housing approvals suggest the need to cut in rates further to boost activity, other indicators give conflicting testimony.

Unfortunately, the most critical statistic for the rates decision – December quarter GDP – is not released until later today, hours after the RBA makes its decision known.

Monday’s ANZ job ads series showed a sharp 10 per cent fall in February to a 3-year low and is another indication of business confidence in substantial decline post GST. Housing approvals also slipped back in January after showing signs of recovery in December.

Last Friday’s worse-than-expected capital investment data showing a 5 per cent fall for the December quarter does not bode well for the GDP figure, which may even show economic growth stopping completely last quarter. The big 10 per cent drop in buildings investment was expected to some extent but it’s the smaller 3.5 per cent drop in machinery & equipment expenditure that is the more worrying.

On the other side of the equation, retail sales for January showed a seasonally adjusted 0.9 per cent rise, much bigger than expected. This suggests that one the most important factors determining the health of the economy – consumers’ confidence to go out and spend – is holding up quite well and may continue to as a safety net under the economy preventing a serious fall.

Also, wage cost index figures last week showing a modest 0.8 per cent gain in wages over the same period for annual rate of 3.4 per cent shows that wage-induced inflationary pressures are well under control – further confirmation that inflation remains benign and removing another obstacle to cutting rates.

If and when there is a cut, for home loan borrowers a 0.25 percentage point drop in mortgage rates will mean a saving of around $16 per month on a variable, principal and interest loan of $100,000.

However, borrowers who maintain their loan repayments at the higher level will enjoy substantial savings in interest payments and loan term. A recent bankchoice.com.au survey revealed that 79 per cent of borrowers would continue to pay at the old rate and forego the opportunity to have more money in their pockets at the end of the month to pay their loan off quicker.