Europe worries and budget cuts intensify pressure for RBA to cut rates in December

Growing concerns about the Eurozone and recently announced plans by the government to cut spending over the next four years are likely to cause the Reserve Bank to cut interest rates on December 6, according to some economists, borrowers and market commentators.

In today’s mid-year federal budget update, Federal Treasurer Wayne Swan announced $11.5 billion in new cost savings over four years and a lower growth forecast for the economy as part of plans to return the budget to surplus by 2012-13.

Economists say the tightening of government purses and the reduced growth outlook is likely to encourage the RBA to cut rates when it meets next week.

Shane Oliver, chief economist at AMP Capital, says the government’s commitment to bringing the budget back to surplus by tightening its spending is likely dampen business and household spending.

At the same time he says Australian banks have been warning that their funding costs have been increasing as the situation in European – and associated global credit markets – has deteriorated.

“If this intensifies, then there is a risk that banks may actually increase their lending rates – both business rates and mortgage rates – independently of the RBA. Such a move would result in a tightening in monetary conditions at the worst possible time. The best way to prevent it from occurring in the short term would be for the RBA to reduce its cash rate,” he says.
Oliver expects the RBA to cut rates in December, arguing that waiting until February 7 (there is no monetary policy meeting in January) would be too high a risk due to “the increase threat from the Eurozone debt crisis, rising bank funding costs and increasing fiscal drag following federal government belt tightening”, all of which is set against a “benign inflation backdrop”.

“A further 0.25% cut in the cash rate (taking it to 4.25%) at its December meeting is justified and further rate cuts are likely to be required next year,” he says.

"There's a 60% chance they will, but I think 100% they should. The risks are just too great," he told the Sunday Telegraph.


Ahead of the budget update, Alan Kohler wrote in his most recent Eureka Report that it was his belief that “there will now definitely be another rate cut in December”.

“The RBA has no choice. If there was a case for a cut in November, there is even more of one in December,” Kohler says.

An online poll carried out by Loan Market, the mortgage broking arm of Ray White, found that 39% of respondents – the highest proportion – expect rates to be cut again at the RBA’s December meeting, with 26% expecting a cut in early 2012.

Loan Market chief operating officer Dean Rushton says the RBA’s Melbourne Cup decision to cut the cash rate from 4.75% to 4.5% provides some clear direction for consumers, but more relief is needed in the lead-up to Christmas.

“There is no doubt they will need to cut further to continue to shore up confidence in the current global environment,” says Rushton.

“A recent survey we ran showed that the issues occurring in Europe were top of mind for consumers when considering their financial position and these issues are not going away and more cuts are needed to stimulate sectors of our economy.”

Peter Strong, executive director of the Council of Small Business of Australia, has urged the RBA to cut interest rates for the sake of the economy and employment and says a rate cut will help a number of small business owners including real estate agents, tourist related business and the service sector as a whole.

“These sectors employ more people and add more to the economy than mines and banks put together and the RBA needs to get its head into reality and away from the over emphasised world of big business.”

 

 

Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

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