Rate cut tipped for May as business conditions slowly improve

Businesses may receive another interest rate cut in May after SME conditions improved in the December quarter for industries sensitive to changes in the official cash rate, the latest NAB quarterly survey has revealed.

NAB economist Alexandra Knight told SmartCompany this morning the Reserve Bank may cut the official interest rate in May in order to provide stimulus to some of the weaker sectors, after conditions improved following rate cuts in November and December.

“We saw some stabilisation in the weaker industries in the quarter, including manufacturing, retail and construction,” she says.

“Those industries are a bit more sensitive to interest rate changes, after we had the cuts in November and December.”

The survey shows conditions rose in the quarter, including for the next three months and the next year. Confidence has also returned from its negative position to a positive result.

Trading conditions have risen to zero points from -4, while conditions for profitability have also improved, although still remain negative. The index of employment also rose by three points, while the indexes for forward orders, stocks and exports all improved.

More importantly, the gap between some of the weakest and strongest industries has narrowed. Conditions improved in retail, manufacturing and construction, although conditions fell in mining due to falling commodity prices.

However, Knight points out that although confidence has risen, it still remains under long-term averages, and notes the result is bouncing back from a pessimistic result in the September quarter.

“I think overall the survey implies the economy is at trend. We’re still expecting softness in mid-term demand, and because of that we see the potential for providing some extra stimulus to those interest rate sensitive sectors.”

“We still see a possible cut in May this year, although we think that will be enough. The RBA is in a good position to lower rates if it needs to.”

According to the survey, capital spending intentions for the next 12 months have fallen over the previous two quarters, and short-term employment conditions are still consistent with a “fairly subdued labour market”.

“Lack of demand is expected to remain the most constraining factor on profitability over the year ahead, while concerns about interest rates, wage costs, capital capacity and suitable labour remained fairly muted,” the survey found.