Rate disappointment premature – economists expect the RBA to bring relief by Christmas

Entrepreneurs and businesses may be annoyed the RBA decided to sit on rates yesterday, but economists say they should take heart – some policy easing is due before the end of the year.

If so, that would be excellent timing. Yesterday’s Dun & Bradstreet survey found more businesses are optimistic about the holiday quarter, and this week Deloitte Access Economics says retail sales are higher than they’ve been for a couple of years.

AMP Capital chief economist Shane Oliver says the RBA statement does acknowledge some easing in the economy, specifically around commodity prices. But he says the tide is turning towards a rate cut before the end of the year.

“I think the RBA is a fairly cautious organisation, and they may regard the fall in iron ore prices as a temporary phenomenon. Perhaps they’d like to see what it does rather than respond straight away.”

This would explain why the bank chose to sit on rates rather than make a cut. If the economy deteriorates, Oliver says the RBA will be in a solid position to cut rates before the end of the year.

In fact, Oliver says he’s expecting two cuts.

“We’ve got one pencilled in for October, and then I think we may see another one in either November or December.”

“There’s also a chance they’ll do some catch-up there as well.”

Oliver isn’t alone. CommSec economist Savanth Sebastian says the bank is expecting another cut in November after the next round of inflation data. “Hopefully this rate cut won’t be required,” he warned yesterday.

ANZ economist Justin Fabo expects the same.

“We’ve had that pencilled in for quite a few months now, and we’re expecting one in November and perhaps one in the first quarter of next year.”

“The RBA is still watching for inflation, and once they get a number we think that’ll make them pretty comfortable.”

“But the other factor is this harsh movement through commodity prices. We think they’ll want to wait a while to see what happens there.”