Rate cut tipped to give waning economy “a kick along”

The Reserve Bank of Australia is tipped to announce an interest rate cut today to boost the waning economy. 

The RBA will announce its rate decision at 2.30pm today and economists and the market are anticipating a 0.25% cut to bring interest rates down to 2%.

Short-term interest futures are implying a 60% probability of a cut today.

Warren Hogan, chief economist at the ANZ, told SmartCompany the economy has lost momentum in the last four to six months.

“It’s not huge but given the slow down in mining we need to see the economy building not waning,” he says.

“We think the economy is growing sub par and that means demand is modest at best and making it difficult for businesses to see a strong reason to invest in what they are doing.”

Hogan says he is expecting the RBA to cut rates “just to give the economy a kick along”.  

“There is an increase in activity in Sydney and to a lesser extent Melbourne and another rate cut would help solidify that and help spread it to other centres like Western Australia and Queensland,” he says. 

Shane Oliver, chief economist at AMP Capital, is also tipping an interest rate cut to 2%.

“Once again it’s a close call as the RBA may decide to wait for March quarter inflation data due later this month and ongoing strength in the Sydney property market is clearly an argument against further rate cuts,” he said in a statement.

“However, the additional 21% fall in the iron ore price since the RBA’s last meeting has added urgency to the case for the RBA to cut rates again at a time when the growth outlook remains subdued, the outlook for business investment is poor, inflation remains benign and the $A is still too high and could break higher as the Fed continues to delay its first interest rate hike.”

Dun & Bradstreet’s latest Business Expectations Survey published today also shows below trend growth is continuing to subdue the economy.

Second quarter expectations for sales, profits, selling prices and capital investment have all declined compared to the previous quarter.

The sales expectation index fell to 32.7 points, from 38.7 points last quarter and 33.6 points last year, with 46% of businesses anticipating a lift in sales compared to 13% which forecast a drop.

The one bright spot is an increase in hiring intentions with 27% of businesses surveyed saying they will hire during the second quarter of the year, up from 24% in the previous quarter and 22% last year, while 10% plan to reduce staff.

While 5% of those surveyed said interest rates would most likely impact their operations in the upcoming quarter the major issues for business is consumer confidence, with 40% saying this would have an impact.

Stephen Koukoulas, economic adviser to Dun & Bradstreet, said the news was disappointing and fits with signs of weaker economic growth, a sharp fall in private sector business investment and what is increasingly an entrenched period of sub-trend economic performance.

“The impact of the slump in commodity prices and ongoing policy uncertainty are clearly behind the weakening trend in business expectations,” he said in a statement.