Wednesday, November 28, 2012

Expect two more rate cuts, starting now - OECD

Neat interactive graph:

The Reserve Bank is set to cut interest rates two more times - once in December and once near the start of next year - taking its cash rate to 2.75 per cent, a new all-time low.

The new forecast from the Organisation for Economic Co-operation and Development has the cash rate staying at the new floor until halfway through 2014. If fully passed on the cuts would bring the standard variable mortgage rate to near 6 per cent, slicing a further $90 from the monthly cost of servicing a $300,000 mortgage.

The OECD credits budget cuts with its forecast of two further rate cuts, saying the government’s determination to achieve a surplus will “dampen demand”, forcing the Reserve Bank to act to shore up the economy.

It says the Bank will be able to act in December because inflation is “contained”, an achievement reached “despite the introduction of a carbon tax in July”.

The OECD forecast of rate cuts exceeds that of the market. Interest rate futures contracts assign only a 55 per cent probability to a rate cut next month. The OECD draws up its forecasts after consulting closely with the Treasury and Reserve Bank. The Treasury has a representative stationed at the OECD headquarters in Paris.

The OECD’s economic forecasts are broadly consistent with those in the Treasurer’s mid-year budget update. It expects Australia’s economy to grow by 3.7 per cent this year, 3 per cent in 2013 and 3.2 per cent in 2014.

It has downgraded its forecasts for global growth to 3.4 per cent in 2013 and 4.2 per cent in 2014, most of which will be driven by China and other emerging economies. The biggest risks to the outlook come from the so-called euro zone which should be in or near recession until well into next year and the possibility of a “fiscal cliff” in the United States when scores of tax cuts and spending measures expire at the end of this year.

The report paints a picture of an uneven economy with mining investment expected to “expand vigorously in 2013 on the basis of announced plans” while job creation slows, unemployment hovers at around 5.5 per cent, and the rest of the business climate is “challenging, particularly in construction”...

The Australian dollar has remained higher than would be expected in the face of lower export prices, holding back exporting and import-competing businesses.

The government’s determination to return the budget to surplus has held back the economy, although not by as much as “would first appear”. Much of the apparent turnaround is the result of shifting spending between financial years and “changes in the accounting treatment of unclaimed financial assets” as well as cuts in defence spending and foreign aid which will have a “limited impact on domestic demand.”

Should economic conditions deteriorate significantly the OCED says the government should delay its planned return to surplus, advice also offered by the International Monetary Fund in its report on Australia earlier this year.

Treasurer Wayne Swan welcomed the forecasts saying since last November official interest rates had been cut five times bringing mortgage rates well below the 8.5 per cent that applied when the government changed hands.

“A family on a $300,000 standard variable mortgage is saving around $4500 a year in repayments compared to what the Liberals saddled them with when they left office,” he said.

In today's Canberra Times, Sydney Morning Herald and Age

Australia OECD November 2012

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