Rates almost certain to fall in September: Economy roundup

Most economists now believe the Reserve Bank board will cut rates in September. The only question; will it cut by a quarter or a half a per cent?

Most economists now believe the Reserve Bank board will cut rates in September. The only question; will it cut by a quarter or a half a per cent?

While the RBA board left rates on hold at 7.25% after yesterday’s meeting, the post-meeting statement by RBA Governor Glenn Stevens indicated that the board is now thinking about cutting rates.

“With demand slowing, the board’s view is that scope to move towards a less restrictive stance of monetary policy in the period ahead is increasing,” Stevens said yesterday.

Economists pounced on the statement and are now certain rates will be falling before Christmas.

Some are tipping the first cut could be half a per cent (50 basis points). ANZ economist Katie Dean says that the two most recent periods during which rates were cut in 1996 and 2001 both began with a 50 basis point easing.

But she is betting on a 25 basis point cut (half a per cent) as a first move this time around because inflation remains a big concern for the bank.

“The RBA needs demand to slow below trend for an extended period. An easing strategy would be about reducing the downside risks to growth rather than looking to revive demand. All this argues for a cautious start to the easing cycle. If a further 25 basis point cut is needed, they can go again in short order.”

Westpac’s chief economist Bill Evans believes the rate cut cycle will eventually see rates fall from 7.25% to a low point of 5.5%, probably by late 2009.

The RBA’s change in thinking received support this morning, with recruitment advertising company SEEK reporting that the number of job ads fell by 0.5% in July.

The sharemarket has reacted positively to the rate cut news and a strong lead from Wall Street, where the Dow Jones increased 2.94% overnight after the Federal Reserve left US rates on hold at 2%.

The benchmark ASX/S&P200 index surged 114.5 points or 2.3% to 4964.9 points at 11:45am AEST. After a torrid few weeks, the big banks were the winners as investors speculated that lending growth could improve if the RBA cuts rates.

NAB rose 3.8%, Commonwealth added 5.2%, ANZ jumped 3.6% and Westpac rose 4.2%.