Economists expect rate cut on Melb Cup day

ByCathy Pieroz

Economists are leaning towards a cut to the official cash rate again when the Board meets tomorrow on Melbourne Cup day.

Last week, AMP’s chief economist Shane Oliver said while the decision was “close”, he believes the Reserve Bank will err on the side of caution and trim the cash rate a further 25 basis points to three per cent.

“With growth likely to slow to around 2.5 per cent, inflation is likely to remain benign and possibly fall,” Mr Oliver said. “If the RBA wants to be confident that non-mining demand will pick up enough to offset the slowdown in the mining sector, then interest rates will need to be cut further.”

Mr Oliver’s comments were echoed by National Australia Bank’s group chief economist Alan Oster, who also believes inflation and asset prices will ultimately encourage the RBA to drop the cash rate yet again in November.

“We believe the balance of odds still favours a 25 basis point cut next week to three per cent,” he said.

“Anecdotal reports suggest that the weakening in business condition evident in our September Business Survey has continued. While iron ore prices have improved in the past month and coking coal prices have stabilised, both are still way down on a year ago.

“The terms of trade weakened further in the September quarter. Steel production in China has fallen further. If the RBA is serious about stimulating domestic activity to offset the coming pullback in mining investment, completing a 50 basis point cumulative move would be an appropriate policy step.”

According to a report in today’s Sydney Morning Herald, 12 of 15 economists surveyed by AAP said the RBA would cut the official cash rate by 0.25 per cent tomorrow. The RBA last cut the official cash rate in October.

While the economists believe the Reserve Bank will move on rates this month – not everyone is quite as certain.

Speaking to The Adviser, Liberty Financial’s national sales manager John Monacheff said he “doubts” the Reserve Bank will cut again tomorrow.

“Will they drop it on Melbourne Cup day? I doubt it. I think they’re going to hold back for this year,” Mr Monacheff said.

“Again I could be really wrong because there’s so much volatility in the marketplace. Have they got room to shrink it? I believe they do.”

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