Wednesday, July 22, 2009

No more rate cuts

"Unless the world blows up"

Hopes of a further Reserve Bank interest rate cut are receding quickly after the release of board minutes pointing to an economic recovery as soon as this year.

The minutes for the Bank's July board meeting held two weeks ago point to an economy "more resilient than expected" with exports "remarkably strong" and some mining companies and ports "operating close to capacity."

The Bank credits a pick up in China with the turnaround as well as the government's fiscal stimulus programs and its own dramatic cuts in interest rates which have more than halved variable mortgage payments in less than a year.

It says retail sales are 7 per cent above their pre-crisis levels, "considerably stronger than in comparable countries," and that both consumer and business confidence is lifting...

"Housing loan approvals have recorded a strong increase, and house prices are again picking up, with the rises becoming more widespread. The outlook is for a gradual recovery to begin later in the year, and downside risks to that have diminished."

The Bank tempers its optimism only by saying that the jobs market is likely to remain soft for some time, but even there points to signs that employers are "making efforts to minimise job shedding."

While holding open the possibility of a further interest rate cut "if needed," the minutes indicate that the Bank would be surprised if it was, noting that the full effects of its previous cuts will be "coming through for some time".

"I don’t think they have any intention of cutting again," said ICAP Securities economist Adam Carr on reading the minutes, "unless the world blows up".

"I mean seriously, it must be a furphy given everything they’ve said about growth. We've past the worst, there can be little doubt about that. Their own growth expectations imply it and rule out another cut."

"We believe the Bank’s easing cycle is over," said JP Morgan economist Helen Kevans. Given the unprecedented policy stimulus in place, Reserve Bank officials, will not wait for the unemployment rate to peak before starting to take it back."

The Bank's forecast of an economic recovery this year is a big advance on the official Budget forecast of a recovery in 2010-11.

The difference is most likely to reflect an improved economic outlook since May rather than a disagreement with the Treasury. It points to a lower than expected budget deficit and a slower run up in government debt as revenues from improved company profits kick in earlier.

The Coalition seized on the improved outlook to demand that the government reigned in its planned spending.

"Please Prime Minister start pulling back on the borrowed spending, said Treasury spokesman Joe Hockey. "We might have seen the worst of the global financial crisis. But Australians are going to pay a massive bill for the massive government expenditure well into the future."

Treasurer Wayne Swan said the worst of the global recession might have passed but that Australia would "live the consequences for some time to come".

"That's why we need to keep in place stimulus to support business and keep customers coming through the door. To withdraw now would be a recipe for higher unemployment."

Published in today's SMH and Age