Don’t count on a rate cut just yet

A sharp slump in retail sales, a fall in borrowing, decreasing house prices, stretching payment terms – it’s been a week of very bad economic data.

A sharp slump in retail sales, a fall in borrowing, decreasing house prices, stretching payment terms – it’s been a week of very bad economic data.

But will this bad news be enough to force the RBA board to start cutting interest rates when it meets next Tuesday?

Morgan Stanley chief economist Gerard Minack and AMP economist Shane Oliver were among those who said the 1% slump in retail sales in June proved the RBA had gone too far. “It can only be a matter of time before retailers – the largest single employer in the country – start to fire their workers,” Minack said.

But the TD Securities-Melbourne Institute monthly inflation gauge released this morning has effectively snuffed out all chance of a cut.

The gauge rose 0.4% in July, after a 0.5% increase in June. Yet annual inflation ticked down to 4.6% from a record high of 4.8% the previous month.

The survey’s measure of underlying inflation, the trimmed mean, rose by 0.4% in the month, after a 0.3% increase in June. The annual pace eased slightly to 4.4%, from 4.5%.

Still, that’s well outside the RBA’s inflation target band of 2% to 3%, and the bank will need to wait for clear signs that inflation is falling before it decides to start cutting rates.

“The monetary policy deliberations from the RBA board next Tuesday will be a tug-of-war between these recessionary indicators and the still high rate of inflation,” TD Securities economist Joshua Williamson says.

But the consensus of economists is that rate cuts are still some months away.

“Putting all this (bad news) together, you realise that the rotation in growth that the RBA desires – slowing consumer spending and stronger exports – is occurring more quickly than perhaps the central bank had expected,” ANZ economist Katie Dean says.

“This provides more confidence that we are now at the top of the tightening cycle. But that doesn’t mean rate cuts are around the corner. Inflation is now at a 16-year high. The RBA needs a sustained slowdown in spending to address these pressures. The RBA needs to see more soft retailing figures before it will be convinced that inflationary pressures can ease.”

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