Rates to be cut despite firmer business spending

The key focus this week was the release of private sector capital expenditure data for the third quarter. According to the Australian Bureau of Statistics (ABS), businesses in Australia still expect to invest $102.68 billion in the year to June 30, 2009. This represents a 21.9 per cent increase from last year.

The data showed that the economy continued to grow during the third quarter, which should help ease the Reserve Bank’s fears of a full-blown recession in the first half of 2009. However, some commentators and financial market analysts have suggested that the survey results do not reflect the full impact of the global financial turmoil and credit crunch which escalated in late September.

As a result, the market expects the ABS’s December quarter survey to show business investment is rapidly slowing and confidence is deteriorating even further. Some commentators predict that material downward revisions to business spending plans are inevitable.

Although the domestic economic outlook looks uncertain for 2009, Australia appears to be holding up quite well compared to other developed countries. According to recent warnings from the World Bank, Organisation for Economic Cooperation and Development, and the International Monetary Fund, the outlook for the global economy continues looks decidedly grim.

Reserve Bank Governor Glenn Stevens and the board will meet next Tuesday to decide what action is required to stop the Australian economy from tipping into recession.
Although the business spending data was slightly firmer than expected, it is unlikely to stop them from making a sizeable cut to rates.

It is more than likely than monetary policy will be shifted from a neutral to expansionary setting in order to prevent the Australian economy from slowing to a standstill. While some have been predicting a rate cut of up to 100 basis points, the more optimistic business spending data has pulled the market’s forecast back to 75 basis points.

The RBA has cut the official cash rate by 200 basis points since September this year. It is currently sitting at 5.25 per cent.

Infochoice.com.au