Tuesday, December 18, 2012

Ultralow. Could next year's cash rate be 2 per cent?

Sharply weaker mining conditions, a “tepid” recovery in the non-mining economy and a collapse in job advertising have prompted the ANZ to forecast four more interest rate cuts next year - enough to the take the Reserve Bank cash rate from 3 to 2 per cent.

The new rate - almost certainly the lowest in a century - would mean ultra low rates for depositors who are already earning just 1.7 per cent on cash management accounts, 3.05 per cent on online accounts and 0.5 per cent on building society and credit union accounts.

For mortgage holders now paying the discounted variable rate of 6.65 per cent it would mean a further saving of $182 per month on payments on a $300,000 loan. If the banks passed on only 80 per cent of the cuts as has been their recent practice the saving would be $145 per month.

The ANZ had previously been forecasting one or at most two more rate cuts in the year ahead. The bank’s head of Australian research Ivan Colhoun said he now expected four cuts because the non mining economy was failing to pick up fast enough to fill the “hole” that would be left by mining.

“The economy has grown below trend in each of the past two quarters,” he said. “Real net disposable income fell in the September quarter. The key issue is whether the weakest sectors of the economy - retail, housing, manufacturing and non-mining investment - will strengthen sufficiently to offset the anticipated slowing in mining investment. The Reserve Bank’s two most recent interest rate cuts suggest it wants further insurance.”

Mr Colhoun said business conditions were their weakest since the global financial crisis. Forward orders weakened sharply in November and capacity utilisation fell to its lowest since mid 2009.

“Each of these trends, if maintained, warns of slower economic growth ahead and of the need for further policy stimulus to avoid a further rise in unemployment. This will likely require a further 0.50 to 1.00 of rate cuts in 2013 - with the bigger figure likely if the Australian dollar remains high or rises further"...

Reserve Bank deputy governor Philip Lowe said in a speech last week the average level of interest rates would most likely be lower for longer than in the past due to changed global conditions and the decision of Australian households to save an unusually large 10 per cent of their income.

Further cuts would make saving less attractive and borrowing still easier.

The Bank cut its cash rate from 4.25 per cent to 3 per cent during 2012. Standard variable mortgage rates slid from 7.30 to 6.45 per cent. The Bank board is not due to meet again until February.

Treasurer Wayne Swan adopted a hard line with state treasurers at a summit Monday, failing to agree to any requests for extra money. But he supported in principle their request to impose the goods and services tax to imported parcels worth $500, instead of the present $1000 as at present. Officials will develop a business case for the change.

In today's Sydney Morning Herald and Age

ANZ December Chartbook

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