Interest rates will fall by 0.25% to 7% for the cash rate at 2.30 pm next Tuesday and by the close of business, the National Australia and ANZ Banks will have followed suit.
They have promised to follow any RBA cut as quickly as possible.
A quarter of a per cent drop in rates is now more likely after the better than expected capital spending figures for the June quarter and the year to June (which included significant upward revisions in spending in both the December and March quarters).
So will it be time to go shopping? David Jones and other retailers would love us to, but there are still too many imponderables out there. Caution is the watch word, and besides the rate cut is well and truly been priced into the market.
We still have business inventory figures to go and the June quarter balance of payments which both provide us with an idea of how much contribution (if any) business inventories and trade could make to growth.
On balance, trade should be a small positive given the sharp rise in export income from higher oil, gas, coal and iron ore prices that have already produced two months of trade surplus in the quarter.
And business inventories could be a touch higher than expected because of the slowdown in retailing and consumption which has happened a bit quicker than expected. But these are the two imponderables that make it hard to forecast.
Some economists say that the gross domestic product could be flat to up 0.4% in the quarter, which would represent a slowdown on the higher rate in the March quarter when GDP rose 0.6% from the December quarter for an annual rate of 3.6%.
But that’s exactly what the RBA has been engineering.
But interest rates will fall Tuesday in what will be followed later in the year by a second cut of 0.25%; or if the RBA decided on a first up 0.50% cut, there wouldn’t be a further cut until the first quarter of 2009.
The bank bill market has 30, 90 and 180 day bills all trading under the cash rate of 7.25%, and there’s a 35% chance of a cut of 0.50%.
The RBA still has to balance growth with inflation which it expects will hit an annual 5% rate this quarter and possibly in the December quarter, although pressures do seem to be easing with the drop in oil and petrol prices.
But higher rents and building costs are still big drivers of inflation in the economy.
In the US second quarter growth was revised upwards to 3,3% annual from 1.9% because of a surge in exports and a plunge in imports: without the trade figures, the economy barely grew, and expectations are for a very sharp fall this quarter as reality sinks home.
But in Australia, yesterday’s June quarter and 2007-08 capital spending figures from the Australian Bureau of Statistics provided a real positive surprise.
Economists had been expecting a rise of around 2% in seasonally adjusted terms in the quarter, but it came in at 5.7% and the March fall was revised to a 1% increase.
The ABS said there are now signs of a noticeable expansion of downstream processing investment from the mining boom.
However, a couple of economists say the figures don’t sit with business confidence surveys and business borrowing, which are both declining.
The ABS’s figures show that new capital spending hit a record $86.4 billion in the year to June, and the third estimate of capex for the current financial year has risen 26.2% to just under $100 billion at a massive $99.758 billion, which looks like rising further as the year wears on, despite some signs of deferred investment.
The ABS said this morning that the "seventh and final estimate for 2007-08 for total capital expenditure is $86,404 million.
"This is the highest seventh estimate on record and has shown an increase of 11.4% from the final estimate for 2006-07.
"There has been growth in both asset classes, particularly building which rose 17.4% while equipment rose 6.6%. The seventh estimate is 1.6% below the sixth estimate. A 1.3% rise in equipment was offset by a 4.7% fall in the building asset class.
"The third estimate for 2008-09 is a series high at $99,758 million which is 26.2% higher than the same measure for 2007-08.
"The third estimate reflects some deferral of planned 2007-08 spending and reveals some spread of investment intentions into downstream industries connected to mining.
"Both asset classes have shown substantial growth when compared to the third estimate of the previous year with building rising 29.5% and equipment rising 22.5%.
"The third estimate is also 14.5% stronger than the second estimate for 2008-09. Building has risen 15.1% and equipment 14.0% between the second and third estimates."
The June quarter itself saw a rebound from the surprise dip in the March quarter (which was revised up anyway by the ABS with new spending found and re-allocated) to show a 1% growth instead of a 2.6% fall.
The ABS said that total new capital expenditure rose a seasonally adjusted estimate rose 5.7% in the June quarter.
Economists had been looking for a 2% rise, so the news is encouraging and means that economic growth will be a bit better than some analysts had thought.
"Equipment, plant and machinery rose a large 8% in seasonally adjusted terms, but the seasonally adjusted estimate for spending on buildings eased half a per cent in the quarter," the ABS said.
Plant and machinery spending accounts for some 8% of GDP, according to Macquarie Bank interest rate strategist, Rory Robertson.
He says it means the economy grew bit quicker in the second quarter than thought.
The ABS said that the March quarter 2008 estim
