Inflation data fuels rate cut predictions

An interest rate cut on Melbourne Cup Day looks increasingly likely, with new figures showing consumer inflation rose just 0.6% in the third quarter, down from 0.8% in the second quarter.

According to the Australian Bureau of Statistics, the key underlying inflation data rose 0.3% in the September quarter – the lowest figure on record – for an annual growth rate of 2.3%.

Economists now expect the Reserve Bank to cut interest rates on Tuesday – which would make it one year since the last rate hike – with further reductions forecast for early 2012.

Shane Oliver, AMP Capital Investors chief economist, says the current setting for interest rates is too high, particularly in light of global economic conditions.

“We expect a 0.25% cut in the cash rate, taking it to 4.5% at next week’s RBA board meeting. The benign inflation cut likely also paves the way for more rate cuts next year,” Oliver says.

An interest rate cut would come as a welcome relief to small businesses, particularly retailers, and could provide a much-needed boost to consumer confidence.

The news comes on the back of Veda’s latest Business Credit Demand Index, which reveals business credit demand recorded its eight consecutive monthly increase since February 2011.

The index measures total business credit application activity over each quarter, comparing it with year-on-year analysis.

In the July-September quarter, business credit demand was up 2.3% on the same time last year. Although demand was 2.1% lower than the June quarter, the general trend remains positive.

Moses Samaha, head of commercial risk at Veda, says despite concerns over a global credit crunch, the latest result indicates credit confidence is gaining momentum.

“This is a positive result given the economic uncertainty in financial markets at the macro level both domestically and internationally,” Samaha says.

“Our results also align with the latest Australian Bureau of Statistics figures, which show commercial finance commitments rose to a three-year high in August this year.”

According to Veda, business finance enquiries have gathered pace since September 2010 and continue to perform strongly.

Due to seasonality, the September quarter saw slightly weaker volumes than the robust June quarter 2011 (-1.7%) but year-on-year performance shows a 4.3% lift.

Business loans in particular recorded strong growth, up 8.3% year-on-year, but dropped 4.9% on June 2011.

Samaha says while most businesses are acting responsibly, it is vital SMEs concentrate on maximising cashflow in the current climate and adjust their credit policies.

“Delays in customer payments has likely put added pressure on SME cashflow… These businesses tend to be more reliant on consumer credit as a source of business finance,” he says.