RBA says it will cut rates before it is too late: Economy roundup

The Reserve Bank of Australia does not need to see signs of inflation coming under control before it will move to cut rates, a senior official has said today.

The Reserve Bank of Australia does not need to see signs of inflation coming under control before it will move to cut rates, a senior official has said today.

Deputy RBA governor Ric Battellino told a Parliamentary committee that the next rate cut could come ahead of evidence that the economy has cooled.

“We cannot wait to see a fall in inflation before we start cutting rates, because by then it would be too late,” Battellino says. “We try to be pre-emptive when we start tightening and pre-emptive when we start easing.”

And, according to Battelino, that time could soon arrive, with the RBA firming in its view that it has done enough to bring inflation back.

“We’re confident we’re on that path. That’s why we’re in a position to respond on interest rates.”

The RBA would be further confirmed in that view by signs that most people believe the economy is slowing, which is revealed in today’s Melbourne Institute consumer inflationary expectations survey.

The median inflationary expectation of the 1200 people surveyed was 4.9% for August, well down on July’s 5.9% reading and below the RBA’s interim target of 5% by December.

A moderate 0.7% rise in average full-time weekly earnings to $1131.40 seasonally adjusted, or 3.7% for the year, also removes a possible impediment to a rate cut.

Of course, even if the RBA does cut rates, it is a separate question as to whether the banks will pass on the cuts to borrowers. RBA assistant governor Phillip Lowe was out and about yesterday “encouraging” the banks to pass on any cut.

“Looking over the last two or three weeks, the 90-day bill rate’s down around half a percent, so that’s significantly reduced the banks’ marginal cost of short term funding,” Lowe says. “I think that means there’s no obvious reason the banks could not pass through any change in the cash rate.”

On the markets today, at 12.30pm the S&P/ASX200 is up 2% on yesterday’s close to 5051.2 thanks to a succession of positive profit announcements.

Retailer David Jones led the way, announcing a profit guidance upgrade of 20% to 25% growth in the second half of 2007-2008.

And Specialty Fashion Group yesterday announced a less impressive 2.8% lift in sales to $538 million, with net profits down 28% for 2008.