Melbourne Cup rates cut on the cards

The Reserve Bank looks set to cut interest rates at its next meeting on Melbourne Cup Day, but not before it reviews the next inflation figures due on October 26.

Yesterday, the RBA left the cash rate at 4.75% for the 11^th consecutive month, saying near-term growth would be weaker due to local and global factors, namely financial turmoil and the subsequent impact on business confidence.

The RBA said it would review its inflation forecasts in light of the consumer price index data for the September quarter.

“An improved inflation outlook would increase the scope for monetary policy to provide some support to demand, should that prove necessary,” RBA governor Glenn Stevens said.

The next inflation figures are due six days before the Melbourne Cup. The Australian Bureau of Statistics has revised down the previous underlying rate from 2.7% to 2.5%.

A low inflation story would allow the RBA to cut its cash rate by 0.25% in November and potentially by a further 0.25% in December.

A rate cut next month would come exactly one year after the RBA controversially raised interest rates by 0.25%, much to the surprise of the business community.

Australian Industry Group chief executive Heather Ridout says the case has been building for a rate cut in order to boost confidence.

“The weakness may be in few areas but they are big areas – like manufacturing, retail and large parts of the construction sector – that are struggling,” Ridout says.

“These sectors are large employers and so we have seen a softening in employment.”

Ridout’s comments come on the back of the latest Australian Performance of Services Index, which was down 1.8 points to 50.3 points in September.

Activity expanded in five of the nine services sub-sectors, with the strongest growth seen in finance and insurance, and communication services.

However, activity in the retail trade sub-sector remained depressed. Respondents noted that uncertainty and low consumer confidence continue to hinder economic activity throughout the services sector.

Commonwealth Bank senior economist James McIntyre says the overall result of 50.3 points is a sign of the resilience of some sectors of the economy in light of the current international backdrop.

“A second consecutive month of expansion in the Australian PSI is a welcome development, though there were some signs of deterioration in September,” McIntyre says.

“The weaker employment index (47.8) suggests current labour market caution by employers may continue whilst global uncertainties remain elevated.”

“This may be assisting the inflation outlook, with the expansion in wages (62.2) more moderate in September.”