Economsits’ rates views diverge

12.Economsits_ rates views diverge

Garry Shilson-Josling, AAP Economist

Sydney

(Australian Associated Press)

The futures market might be getting a bit ahead of itself as far as interest rate cuts are concerned.

Or maybe not, depending on which economist you listen to.

The market’s priced in another interest rate cut from the RBA by the end of the first quarter of next year, with a cut from the current record low of 2.0 per cent to 1.75 per cent priced as a 50-50 proposition.

It’s a view supported by ANZ’s economists, who last week nominated both February and May as likely candidates for rate cuts, bringing cash to 1.5 per cent by mid-year.

But the view is hardly unanimous.

In a report on Monday, NAB’s economists set out six reasons the RBA should not be cutting soon:

– The parts of the economy outside the mining sector are picking up.

– It wouldn’t help the things holding the economy back – mining investment and falling export commodity prices.

– The parts of the economy that respond to lower interest rates are already strong and, in the case of the housing market, too strong.

– Interest rates are already low and the effect of earlier cuts is still flowing through.

– The Australian dollar has at last fallen and is now clearly helping the economy.

– The RBA should conserve the remaining two percentage points of potential cuts in case they’re needed to offset an unexpected shock to the economy.

More evidence emerged on Monday that appeared to confirm the economy is doing better than it has recently.

The Australian Industry Group gauge of activity in the services sector posted its fourth consecutive reading above the 50 level in September, implying the sector is expanding.

And the ANZ’s count of job advertisements jumped 3.9 per cent in September, lifting annual growth to 13 per cent, from eight per cent a year earlier and a fall of 15 per cent the year prior to that.

ANZ chief economist Warren Hogan said low interest rates and the friendlier exchange rate were both helping.

“The positive trend in job advertising is a sign that the economy is so far adjusting relatively well to significant headwinds from falling commodity prices and mining investment,” he said.

But he is not so confident that the positive effects will persist – he expects slower jobs growth next year.

“This is likely to prompt the Reserve Bank to provide a little more monetary policy support to prevent the unemployment rate from rising further,” Mr Hogan said.

NAB’s Ivan Colhoun sees a chronically sluggish labour market as the main risk to his view that rates won’t go any lower this time around.

Even if that scenario emerges, he said it would not be until six to 12 months from now.

But the futures market says the cash rate will already be at 1.75 per cent by then.

A lot hinges on trends in employment and unemployment over the coming months.

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