The European Central Bank has lopped its key interest rate, but don’t expect the Reserve Bank to follow suit next Tuesday unless there’s a significant worsening in the markets before then.
But the cut by the ECB was only 0.25% to 1.25% for its key rate, leaving markets perplexed. That saw the euro rise.
But the Group of 20 meeting overshadowed the news, as did another solid day for stockmarkets.
But a cut in Australia looks increasingly unlikely as the surge in global financial markets continues into the early days of the second quarter, after markets hit multi-year lows around March 3 to March 9.
Coming after the 2% fall in retail sales in February and the rise in building approvals (which were pushed up by a jump in non private dwelling approvals in NSW in the month from a 40-year-low), most commentators would be tipping a rate rise.
But that doesn’t seem to be the case. Goldman Sachs JBWere didn’t release any analysis yesterday after ruling out a rate cut by the Reserve Bank board next Tuesday hours before the lower retail sales and mixed building approval figures were released on Wednesday.
But a couple of other business economists did.
All have pointed to columns by Terry McCrann in the News Ltd tabloids and Alan Mitchell in the AFR who both said the RBA will sit pat next Tuesday and not cut rates.
Both are considered to be ‘well-connected’ to the Reserve Bank.
Economists at UBS said: "today’s (Wednesday) data are mixed with a drop in retail sales and skilled vacancies, but a lift in building approvals.
"On retail sales however, we note that there was always going to be a month when consumers dropped back to their underlying trend – we just did not think it would necessarily be February.
"Today’s data – along with recent downgrades to world growth forecasts by the OECD and World Bank, and Deputy Governor Battellino’s implicit Australia GDP growth downgrade yesterday – add to the case for further easing by the RBA.
"That said, usually ‘well-sourced’ journalists have now declared that the RBA will hold rates in April, such that we now also expect the Bank to pause next week, before cutting rates further to 2% over the coming months."
But Merrill Lynch took a different view, it still reckons a rate cut is in prospect:
"The slump in retail sales in February suggests the boost to consumer spending from the Government’s fiscal payments and lower interest rates is already fading.
"This is despite perhaps one of the most aggressive easings of monetary policy by the RBA on record, and direct fiscal cash payments to low-to-middle income earners totalling $8.7bn (0.75% of GDP) in December.
"While lower rates and a further $11bn (0.9% of GDP) in fiscal payments in late 1Q and 2Q09 will mitigate the downturn in spending, we do not believe the income relief will be sufficient to avoid a consumer recession in 2009, particularly in discretionary spending areas.
"In our view, decelerating disposable income growth from falling employment and de-leveraging (rising savings), along with material wealth destruction and fragile confidence will overwhelm the benefit to incomes from lower interest rates and transfer payments.
"The very weak retail sales data in February is consistent with our view that the RBA will lower the cash rate by 25bp to 3.0% on April 7th."
And Macquarie Bank interest rate strategist, Rory Robertson says that “Whether or not the RBA cuts next Tuesday REMAINS A CLOSE CALL, in my opinion.
"With the news of our deepening recession still being factored into the RBA’s forecasts and policy assessments, the decision next Tuesday will be a "judgement call" made on the day by Governor Stevens and the Board.
“My strong sense is that IT’S WAY TOO EARLY TO RULE OUT A 50BP CUT."
