Rate cut rejoicing?

I am torn over yesterday’s rate cut.

On the one hand, it’s a great little boost for SMEs going into the New Year, particularly for those in the retail sector.

Entrepreneurs I’ve been speaking to over the last month or so have been saying we needed one more rate cut to really spur confidence and get those customers who are sitting on the sidelines spending again.

They’ve got that cut now and it will be really interesting to see if and when that spending might come through. Will it be before Christmas or sometime in the early 2012, when businesses can come back and perhaps accelerate growth plans?

Either way, let’s hope the cash that is on the sidelines does start flowing again.

As CommSec economist Craig James said yesterday: “Today’s rate cut provides opportunities for businesses, consumers and home buyers. Over the past year most people have focused on the risks and as a result, spending, investment and hiring have proved sub-standard. Now is the time for Australians to become confident again.”

Of course, James and his fellow economists aren’t all that rosy. If you have read the RBA’s statement on the rate cut decision, you’ll appreciate that there are some really dark clouds on the horizon.

Right at the top, the RBA governor Glenn Stevens gives a very, very bearish view of the global economy.

“Growth in the global economy has moderated this year after a strong performance in 2010. Some of the slowing reflected temporary factors, and as these passed, the pace of expansion in the United States and much of Asia began to pick up around mid year. China’s growth has been slowing, as policymakers there had intended. Trade in Asia is now, however, seeing some effects of a significant slowing in economic activity in Europe.”

While the RBA does say the Australian economy is chuffing along at its long-term average growth rate (although this does have a fair bit to do with the mining sector) they have clearly become very concerned about the global outlook.

Craig James also points out that actual lending rates – as opposed to official rates – aren’t yet at the point where the economy is being stimulated.

“Even if banks pass on the rate cut, lending rates will still be slightly above “normal”. That is, interest settings are still slowing the economy modestly. But there are other factors to consider – the exchange rate is still high, credit growth is weak and home prices are falling.

“So arguably interest rates need to fall further to offset other financial indicators that aren’t providing the economy with much assistance at present.”

Bill Evans, chief economist at Westpac, expects further cuts in February and May as the RBA seeks to give Australia some protection from the very worrying situation in Europe.

“We do not expect to see developments, either global or domestic, over the course of the next three months that would allay the concerns which have clearly motivated the Bank’s recent two decisions to.”

In other words, more rate cuts will come only after we see some more pain.

Our best hope is that consumers and businesses see this rate cut as a symbol – it’s time to look past the risks and focus on growth opportunities. Let’s hope we can build the confidence we need.