In just over two weeks, expert predictions of a rate rise have been replaced with those of a rate cut.
Global stockmarkets have had a rollercoaster ride of late, with daily headlines of major economic powerhouses teetering on the brink defaulting on their debt, adding to the worry that we could be headed for a global recession.
Here in Australia, the July jobs data revealed unemployment is rising which will be giving the Reserve Bank of Australia food for thought as it prepares for its next meeting on September 6.
According to finance guru Peter Switzer, there have been four major concerns which have kept the Bank steadfastly committed to interest rate rises. They have been the expected strength of the terms of trade, the forecasted pipeline of business investment, the inflation bogy and the tightness of the job market.
“Considering how the global economic outlook has been marked down in recent weeks — the stock market’s massive fall underlines that expectation — the Bank’s forecasts on the terms of trade surely will be too high,” he writes in his publication Switzer Broker.
“Meanwhile, the weakness of the European and US economies could easily affect the willingness of overseas investors to go long local mining and gas projects for the time being.”
“Previously, I have argued that the so-called business investment pipeline, which federal Treasurer Wayne Swan often refers to as a ‘saviour’, could be stretched out or even blocked, albeit only partially.”
A lesser terms of trade and a reduced flow of business investment means less demand, which in turn will ease the inflation levels – which have been foremost in the RBA’s mind.
“Inflation did come in higher than expected, but the ‘banana effect’, because of the cyclone and floods, have been blamed for the higher headline rate, which went from 3.3 per cent to 3.6 per cent,” Mr Switzer writes.
“However, the more relevant underlying rate came in at 2.7 per cent, which is inside the Bank’s 2-3 per cent target band. Given what we are seeing with the weaker Aussie economy, inflation does not look like it will be a 2011 threat and it could be mid-2012 before excess demand will be high enough to drive up inflation to worrying levels.”
Employment growth has been losing pace since late 2010, from the days of the Melbourne Cup rate rise and the subsequent move by the banks to lift their rates higher than the 0.25 per cent.
Employment growth is now at 19-month lows, averaging 5,900 per month which is a far cry from the 30,200 jobs which were created each month in 2010.
Mr Switzer writes: “If you were on the board of the RBA, would you be game enough to ask: “C’mon Glenn, can we give ‘em a cut?” I would.”