The case for a rate cut builds

A sharp slump in retail sales during June and a weaker outlook for the business sector are starting to fuel expectations of a rate cut before Christmas.

Data released by the Australian Bureau of Statistics this week showed that retail sales fell by 1 per cent in June to $20.04 billion, which is the largest monthly fall in six years. The slowdown in sales provides even more evidence that high interest rates, fuel and food prices are taking their toll on the average household budget.

The outlook for the business sector is also looking gloomy. A survey by a major bank found that business confidence in Australia for the September quarter is at its lowest level since the June quarter 1991. The survey found that 30 per cent of the surveyed businesses expect some deterioration in their industry. The most pessimistic firms were in the property services, construction, transport and storage, household goods and car retailing sectors. Higher borrowing costs, tighter credit conditions, falling consumer confidence and volatility in the financial markets are key factors responsible for this softening in business sentiment.

There’s no doubt that this deterioration in economic indicators is starting to build a solid case for a rate cut. Although it’s still highly unlikely the Reserve Bank will change its tightening stance when it meets next week, market pundits are predicting that the Bank’s next move will be a cut.

The economy appears to be slowing much faster than originally forecast. While the bank will be pleased that signs of weaker demand are emerging, it’s unlikely it will be able to ease its current monetary policy setting until there is clear evidence that inflation is well on the way to the 2 to 3 per cent target band.

Infochoice.com.au