Another interest rate cut looming ? I think so !

Celebrated playwright George Bernard Shaw once famously quipped: “If all economists were laid end to end, they would not reach a conclusion.”

Each day I read articles in our major papers, and hear the predictions of the Australia’s leading economists.

And I have lived through the high’s and lows of the economic roller coaster working for the Commonwealth bank for over 30 years.

There is one thing I learnt – the Townsville Economy is a great barometer of what’s happening in the community.

And we are great predictor of interest rate movements.

The experts in my books are the retailers and home buyers.

What I seen last weekend was a Coffee Club full of people – Harvey Norman staff telling me it was quiet – Toyota dealers saying it’s mixed – and general trades people saying it’s still tough out there. Bankers are saying more foreclosures to come to market – house buyers still looking for a bargain.

What is for certain s there are more frequent calls from buyers than 2 years ago -and some consistency in the calls.

So that’s what the local experts are saying – the coal face so to speak.

The following articles taken from today’s major paper’s are certainly pointing to data that is a little mixed.

The Courier Mail reported today interest rates may be cut again as early as next month, with the Australian property sector stuck in the doldrums following a 3 per cent fall in housing loans since the start of the year.

The continuing weakness in the housing sector, combined with the slowdown in the mining sector, may force the Reserve Bank to next month cut the cash rate to 3.25 per cent – its lowest level since the worst of the GFC – economists said.

The market has priced in a 75 point fall in the official cash rate to a record low of 2.75 per cent by March next year as gloom descends on the global economic outlook, with Chinese demand for commodities falling sharply in recent weeks.

The official data released by the Australian Bureau of Statistics yesterday showed home loans approvals fell a further 1 per cent in July.

The biggest falls in approvals were in NSW (-2.7 per cent), Queensland (-2 per cent) and Victoria (-1.3 per cent), with Western Australia (+1.8 per cent) the only state to register a growth in approvals.

 The housing finance figures also showed a small improvement in first-home-buyer activity, while there was a small rise in the commitments financed by non-bank lenders as buyers shopped around for better deals after the big banks refused to pass on recent falls in official interest rates in full.

Borrowing costs may be below their long-term average following the RBA’s lowering of official interest rates by half a percentage point in May and another quarter of a percentage point in June but the data showed households remained cautious about increasing debt levels.

Master Builders Association chief economist Peter Jones said the RBA needed to act: “The building industry is in dire straits and the RBA must act next month to kick-start the housing sector.”

Most economists had previously been tipping a Melbourne Cup Day rate reduction in November but the gloomier outlook has boosted calls for an earlier move.

St George Bank senior economist Jo Heffernan said, while the outlook for the housing sector remained soft, it would be developments in China, Europe and the local unemployment figures that would be the key to any future rate cuts.

The Sydney Morning Herald reported :

Spring is in, bringing with it warmer weather, horse racing, house trading and the almost inevitable interest rate move by the central bank.

While the first three are staples of the Australian calendar, the last one is fast becoming a fixture. The Reserve Bank has picked November to ratchet official interest rates higher or lower for each of the past six Melbourne Cup Days.

This November may be no different – with investors pencilling in another RBA interest rate cut by then. The only doubt, it seems, is whether the central bankers will wait that long, with the odds slightly better than even that the reduction will come at the bank’s October 2 rates meeting.

“[We are] looking for 50 basis points of rate cuts from the RBA over November-December, with a risk they may start in October,” said UBS economist Scott Haslem. That view marks a shift from their earlier forecast that the RBA would be content to leave rates on hold at the current 3.5 per cent for the rest of 2012.

The RBA certainly has some worrying signals to consider about the strength of the Australian economy. Housing markets remain sluggish – notwithstanding the annual ‘Spring selling season’ – consumers aren’t in the mood to spend big, and now the mining boom is losing some of its bluster.

China key

China is likely to be the trigger, if the RBA needs one. The country accounts for about a third of Australia’s exports, with its impact amplified because of China’s impact on the growth rates of neighbours such as Japan and South Korea.

The latest monthly data from the Middle Kingdom has generally been on the weak side – particularly trade – reflecting in part the effects of earlier efforts to cool the overheated property sector but also waning demand for yet more Chinese-made goods in the US and Europe.

National Australia Bank economist Rob Henderson said the market is tilting towards an interest rate cut next month rather than November, with China only one of several risks stalking financial markets.

“I think a 60 per cent chance from the market’s perspective is not a bad probability to have priced for October,” he said.

In addition to concerns about China, Europe’s debt crisis has hardly gone away. Germany’s Constitutional Court, for instance, is expected to rule on the validity of the European Central Bank’s bailout fund as soon as tomorrow, while the Dutch will hold elections – both events could rattle or reassure investors.

Westpac head of Australian interest rate strategy Damien McColough said the backdrop to the RBA’s October decision was “worsening” making at least a 50-50 bet on a rate cut in October “fair.”

Fixed-rate movers

The major banks are sending signals of their own, concerning where they think rates are headed, with several of them already cutting their fixed-rate loans.

Westpac yesterday sliced between 5 and 50 basis points from their fixed-rate mortgages.

Data from RateCity showed that since September 1, Commonwealth Bank cut fixed-rate mortgages by an average of 20 basis points and National Australia Bank reduced theirs by an average of 15 basis points. (There are 100 basis points in a percentage point.)

“Fixed home loan rates are usually an indicator of the direction variable home loan rates will take so when fixed rates drop it usually means variable rates will follow,” said RateCity spokeswoman Michelle Hutchison.

The ANZ holds its regular monthly review of interest rates on Friday. A cut in their variable interest rates would be the first since the bank started down an independent path from the RBA in January. A spokesman declined to speculation on the bank’s likely decision.

It has, though, lifted rates in a month when the central bank stayed put.

While financial markets fluctuate hourly according to sentiment shifts, the RBA’s main focus remains the state of the domestic economy. Australia marked 21 consecutive years of growth at the end of the June quarter, and the jobless rate even dropped back to 5.1 per cent last month, underscoring the economy’s ongoing resilience.

Big miners, though, are cutting back as falls in key commodities make some mines unprofitable. BHP Billiton and Xstrata yesterday revealed plans to cut 900 jobs in their Queensland coal operations.

The RBA, no doubt, will be watching for more such weakness before deciding to use up more of their stimulus ammunition. For now, though, investors reckon on two more cuts this year and another two by next September – bringing the cash to levels not seen in at least half a century.

So there it is.

I stand by what I have been saying for months – more aggressive cuts to come.

An over riding reason more compelling than ever – we are still in a “crisis of confidence”. We are driven by belief systems that were reset after the 1987 stock market crash – recovered by 2005 – and again where smashed in 2007 with GFC.

Tony Robbins sums it up “Beliefs have the power to create and the power to destroy. Human beings have the awesome ability to take any experience of their lives and create a meaning that dis empowers them or one that can literally save their lives”.

Interest rates cuts are the only real stimulus that has shown the ability to turn confidence around.

P.S. Don’t fix your rates yet – my tip is that as attractive as the look now – they will get lower !

 

Graham Lynham

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