At least one more RBA rate cut tipped by economists for the year, with focus on China and exchange rate

The consensus among economists is for at least one more rate cut in 2012 following yesterday’s unsurprising decision by the RBA to leave the cash rate unchanged at 3.5%.

Post-decision analysis focused on RBA concerns about China and the global economy while also noting comments from RBA governor Glenn Stevens that in Australia, “most indicators available for this meeting suggest growth has been running close to trend” while mortgage rates remain encouraging for borrowers, running currently “a little below their medium-term averages”.

Westpac chief economist Bill Evans is tipping a 25-basis-point rate cut at the RBA's November board meeting, but also expects a further rate cut in December.

“Broadly speaking the assessment of the global economy appears to be more downbeat, while there is little evidence of any change in the view on the domestic economy,” says Evans.

Evans highlights that “the outlook for China is more uncertain and that the terms of trade have declined significantly”.

“We expect that accumulating evidence that the domestic economy is losing momentum; the labour market is genuinely weakening; financial conditions are tightening due to the divergent behaviour of the terms of trade and the Australian dollar; and the global growth environment remains uncertain will ensure that a convincing case for a further monetary ease is apparent by that November meeting.

“The bank is clearly keeping its options open despite the fact that we assess that it is markedly closer to a rate cut stance than it was a month ago. However, the evidence on the domestic economy will need to make a stronger case for a rate cut than has been the case over the last few months.”

Commonwealth Bank economist John Peters says the bank has retained its view of a 25-basis-point rate cut in the fourth quarter, with the main pressure for lower rates comes from global downside risks.

“If anything the RBA now sees the international growth outlook as a little more subdued as was the case a few months ago. Probably the most crucial line in the RBA’s statement accompanying today’s decision is some recent (international) indicators have been weaker, which has added to uncertainty about near-term growth,” says Peters.

Australian Financial Review economics editor Alan Mitchell says the big concern is the Australian dollar, which he says is not playing its role in cushioning the economy by falling with the terms of trade.

“A weaker dollar would be good for marginal mining projects and for the manufacturers and trade-exposed services,” Mitchell says.

“Currency experts are predicting that the dollar will adjust to the new and more sombre Chinese economic reality, but if it doesn’t, the Reserve Bank will have to weigh in with a reduction in the official cash rate.”

Fairfax columnist Malcolm Maiden says the RBA’s inclination to cut rates “has grown” since the last statement, with the focus on global growth being “no more than average pace” but with the added phrase that the outlook is “still on the downside”.

Maiden says RBA commentary on China’s growth has also become more cautious than a month ago.

He says the cash rate could be cut as early as October if local economic signals and overseas signals don’t improve.

HSBC Australia and New Zealand chief economist Paul Bloxham describes yesterday’s statement by governor Glenn Stevens as “more hawkish then expected” with “concerns about the 'death' of the mining boom were nowhere to be seen”.

“Having gotten rates down ahead of the recent weaker data from China and Europe, and the fall commodity prices, they clearly felt they have time on their side. Getting 'ahead of the game' early has this pay-off."

Bloxham adds that the statement also repeated an earlier mantra – heard at the RBA's recent parliamentary testimony – that is too early to judge the full impact of the rate cuts that have already been made.

Bloxham is tipping another 25-basis-point cut before year-end, but believes that the 100 basis points of easing priced in over the next year is overdone.

CommSec economist Savanth Sebastian says it is clear the RBA is happy to remain on the interest rate sidelines – “at least for the time being”.

"Policymakers seem comfortable with domestic economic conditions but continue to watch the global situation carefully. Europe, the US and Asia have slowed and the central bank seems particularly focused on the slowdown in China, given its importance to Australia’s growth profile."

He says the variable housing rate is applying modest stimulus to the economy, at present at 6.85% below the 15-year average of 7.20%.

ANZ economists Ivan Colhoun and Justin Fabo describe the decision as “widely expected”, with much of the governor’s statement “very similar to recent public pronouncements”.

“Overall, our views on the Australian policy outlook and economy are largely unchanged.

“We continue to expect the RBA to end up changing its mind about interest rates, probably by November."

Colhoun and Fabo say the disappointing response of the sharemarket yesterday was likely a reaction that suggests the RBA “continues to read the economy in a slightly too optimistic way and evolve its view slower than the underlying economy”.

“The current trend to reduced resource investment (albeit more an issue for growth in 2014 and beyond) and the continuing downward trend for job advertising (the ANZ job ads series has now fallen for five months in a row) suggest at least one easing before the end of 2012 and further easing over 2013, perhaps more than our currently factored 50 basis points in total."

The next RBA board meeting is on October 2.