Rates likely to stay on hold – is a cut on the horizon?

It is a sign of the times that some economists are now beginning to countenance something that until recently would have been almost unthinkable – a cut in official interest rates this year.

Recent weak data on retail sales, private credit and business and consumer confidence have economists feeling confident that the Reserve Bank of Australia board won’t announce an interest rate rise when it comes out of its meeting at 2.30 pm today.

A Credit Suisse index now has the probability of a rate cut in the next 8 months at 43%, although until inflation figures show some signs of coming down it will probably remain less rather than more likely.

Two factors are behind rapidly changing attitudes to the RBA’s likely future actions. The first is the sharemarket crunch, with the Australian markets having lost more value in the last quarter than at any period since the 1987 crash.

The S&P/ASX 200 declined by 15.5% in the first three months of 2008 and is now down 21.1% from its high on November 1 2007.

The other factor is that the banks are doing the RBA’s tightening job for it as they lift rates in response to higher finance costs. St George yesterday became the most recent bank to move, announcing a 0.1% rise in its variable home loan rate to 9.47%.

The tough conditions are biting in the manufacturing sector, with The Australian Industry Group-PricewaterhouseCoopers Australian Index of Manufacturing Industry health falling 0.2 points to 51.2, just keeping its nose above the 50 point line separating growth from contraction.

On the markets, it has been another volatile morning, with the S&P/ASX 200 rising and falling by around 60 points to be sitting at 5339.6 at 12.35 pm, down 0.3% on yesterday’s close.