Two big decisions this week for Australia – both occurring tomorrow and both around the same time. At 2.30pm the Reserve Bank releases its latest interest rates decision and then an hour or so later, the Melbourne Cup will run and won.
A number of economists reckon there could be a rate cut tomorrow – the AMP’s chief economist, Dr Shane Oliver thinks there is a very high chance of a cut.
“The case to cut is powerful as a rate cut now will head off already announced big bank mortgage rate hikes and the threat this will pose to consumer spending at a time when economic growth is weak, non-mining investment is poor, the contribution to growth from home construction looks like peaking next year, El Nino related drought risks are posing an additional threat to growth, the terms of trade is still sliding and inflation remains below target,” he wrote at the weekend.
He said that there is a chance the RBA could hold off until it has more information, which brings December into play.
There is more certainty about the Cup – we know there will be a winner. With the RBA, its very much up in the air. It’s meeting tomorrow in Melbourne will hear the latest forecasts from bank staff for the economy for this year and 2016, which will drive the eventual interest rate decision.
In fact it’s a very big week for the central bank and by the end of Friday we should have a very good idea about how the bank is looking at the economy.
First up, it is clear that lending to business has accelerated from May when the RBA cut its cash rate a second time this year (after February) to help support the economy. It jumped 1.2% in September from August, a seven year high and has jumped from a month on month growth rate of 0.1% in June.
If there is no rate cut, then the strong rebound in business lending will have played a major part in the decision, along with the solid rebound in global markets – the Aussie market rose 4.3% in October, China more than 11% and US and European markets by 7% or more.
The postponing of the Fed’s rate rise decision and then hints of extra easing in Europe and then the rate cut by China have played a part in steadying markets, along with the belief that China’s economy was not sliding to a halt.
Governor Glenn Stevens is due to speak on Thursday, a few hours later his deputy, Phil Lowe appears on a panel at a business conference and on Friday the bank’s final Statement of Monetary Policy for the year with the update economic forecasts for GDP and inflation for this year and next, will be issued.
Some economists reckon that for the first time in months, a decision to cut rates is being seriously entertained, others say the bank is sitting on its hands as the economy continues doing what it thought it would do – grow slowly, keep a lid on unemployment and gradually develop momentum.
Many economists and others claiming their could be a cut point to the recent rises bank mortgage rates by the big four trying to recoup some of the cost of raising additional capital demanded by regulators.
The argument goes that the Reserve Bank will look at this as harming housing, the one area of the economy doing well. But that’s not right because it ignores one very important point.
And that is the mostly unnoticed fact that a majority of people with mortgages are ahead with their loan repayments, so the rise in rates won’t have any direct impact – all it will do is shrink the pace of extra repayment.
The health of the home building sector will be confirmed later today with the release of building approvals data for September (and an early look at how the quarter went).
The retail sales and trade data for September will be issued on Wednesday, too late for the RBA meeting, but not for a major speech on the economy on Thursday from RBA governor, Glenn Stevens.
He speaks around 9.25am on Thursday, while his deputy, Philip Lowe is on a discussion panel in Sydney at lunch time, and the RBA’s last Statement of Monetary Policy for the year is released next Friday.
The RBA had more evidence on Friday with a further slowdown in September in investor lending for home purchases.Lending to owner occupiers continues to be solid, which will please the central bank. And the RBA won’t be too disappointed with that is now happening in the Sydney and Melbourne home markets as price growth slows and clearance rates plunge.
And then there’s business lending – the September credit data on Friday shows that running at an annual rate of 6.3% last month, the strongest growth since early 2008, before the GFC intensified.
In fact growth in business lending has nearly doubled from the 3.8% annual in September 2014. And the month on month rate was also the highest for seven years, up a very solid 1.2%.
In fact lending to business is now growing much faster than home lending (which grew 0.7% month on month in September). That growth in business lending means the pace of activity in the wider economy is spreading as more and more businesses demand finance from banks and other lenders.
Thanks to business and housing,overall credit growth in September was 0.8%, the best since September 2008. Lending to individuals (personal loans, credit card advances) remains weak, as it has been for years.
And as we hear from the NAB and the ANZ last week, that business lending is getting very competitive with the big banks and others cutting rates to lend money. That will also please the bank (but cause a flutter of worry about the price cutting, especially if it is in commercial property).
