Local economy slows, but rates may stay high

With retail sales plunging, credit tight, building approvals down and both consumer and business confidence at near recession levels, even market players are starting to price in an early rate cut.

That is clear from the reaction of the bank bills market to yesterday’s fall of 1 per cent in Australia’s retail trade during June.

Players there are now aggressively pricing pricing in a cut in interest rates, sooner rather than later.

So it is now more more tempting than ever to think that the Reserve Bank will soon do the right thing.

That is, of course, cut Australia’s interest interest rates.

This dream, held by an increasing number of Australians, is gradually taking firmer hold among the public, too.

But there are still restraints.

The main one is that Australia’s inflation rate, at 4.5 per cent, is still well above the Reserve Bank’s target range of 2-3 per cent, over the course of a business cycle.

But we can dream.

The bank’s board will meet next Tuesday, to review rates.

That will be its normal monthly meeting.

But most economists still believe there won’t be a rate cut, any time, this year.

Alan Langford, of HBOSA, is one of them.

The Reserve Bank has accepted that the Australian economy is slowing.

But Langford says it is still far from ready to cut rates.

“The brief statement the RBA will issue next Tuesday, following the Board meeting, will not give too much away,” Langford says.

“But the detailed quarterly statement on monetary policy on Monday August 11 will incorporate the revised GDP and inflation forecasts.”

Langford said these would set out a road map, for future rate cuts.