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A cut not unkind

EVERYONE would like to know whether there is a likelihood of interest rate cuts in this cycle. The consensus of opinion among economists appears to be that there is a possibility of one more cut.

This was a view expressed by Dr Chris Caton, principal economist with BT Funds Management. The reasons for the cut are nothing to do with the performance of our econo-my here in Australia.

All of the economic data coming out at the moment suggests quite strongly that we are in a relatively insulated position here.

Our GDP forecasts have been revised downward but not to the same extent as those of the US or Europe. The US forecasts are almost for a halving of the growth rate that was previously forecast. There seems little doubt now that the rest of the world is definitely in a recession.

So it is to protect us from the downturn in the rest of the world that the RBA will need to cut interest rates at least once more in this cycle. The timing on the cut also will be viewed with interest. It is unlikely that the RBA will act in its November meeting.

As most of our readers would know, the RBA meets on the first Tuesday of every month. And, as most of our readers also would know, the first Tuesday in November is Melbourne Cup day. So we can effectively rule out any serious business being undertaken on that day anywhere in Australia. It also is highly unlikely that we will see a cut during an election campaign. Hence, the first opportunity after that date will be the first Tuesday in December.

The size of the cut is expected to be around 25 basis points or 0.25 per cent. It is probably unnecessary for the RBA to cut rates any more than that. That should provide the necessary protection that our economy needs from the rest of the trading world.

The other factors that have been protecting our economy have been the export surge we have had since the dollar has declined to its current levels.

Given that it is unlikely that we will see substantial change in the value of the dollar, there is no reason to consider that the export surge should be maintained. The only mitigating factor against the maintenance of the export levels is that our trading partners are in recession.

One other factor that has been helping our economy is the housing sector. Because of the first home buyers’ grant, the housing sector has been very strong. Most of the GDP growth that we have seen recently has been due to the housing sector alone.

The extension of the grant for a further six months should allow that sector to remain buoyant for a little while longer.

So it seems almost certain that there will be at least one more cut in interest rates in this country. This should allow us from falling into the recessionary environment that the rest of the world currently is in.

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