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Spending cuts add to case for rate cut

Georgia Wilkins, Chris Zappone   Sydney Morning Herald    October 22, 2012

The release of the government's mid-year economic and fiscal outlook has provided the Reserve Bank with more ammunition for a Melbourne Cup day rate cut, analysts say.

The government unveiled a series of spending cuts today, aimed at delivering a forecast surplus of $1.1 billion this year, down from $1.5 billion forecast in the May budget.

The fall in commodities prices, which has thinned government tax receipts, is expected to contribute to the need for lower official rates in November.

Westpac head of Australian interest rate strategy Damien McColough said the weakening outlook for the budget and the commodities boom would trigger another rate cut in November, following the Reserve Bank's 25 basis point cut in October.

"It’s all about iron ore prices and coal prices, so as always with Australia being a small, open economy, we’re very vulnerable to global growth prospects," he said.

The budget update showed that falling commodities prices would lower government mining tax receipts to $9.1 billion from an earlier projection of $13.4 billion over the next four years.

"The market has been saying for a long time that, because the government is so focused on surpluses it means that the RBA has to do more heavy lifting," Mr McColough said.

Currently 23 of 26 economist polled by Bloomberg tip a November rate cut, in light of a weakening outlook for the economy and the slowdown in the China-driven commodities boom.

Credit Suisse interest rate futures showed an 86 per cent chance of a rate cut next month after the update was published, against an 83 per cent chance before the government provided the mid-year outlook.

Signs have emerged in recent months that the mining investment boom may end sooner than originally forecast, as Asian economies post slower growth and businesses in Europe and the US continue to grapple with faltering activity.

Official inflation data to be released Wednesday will provide another key signal about the future timing of rate cuts. Economists anticipate consumer prices to have risen by 1.6 per cent in the year to September - well within the RBA’s preferred 2-3 per cent inflation target.

The Australian dollar was hovering around $US1.031 after the release of the outlook, hardly changed from before the release.

But Rochford Capital director Derek Mumford said the spending cuts in the budget update suggested further rate cuts to come.

‘‘[The budget update] does open the door for further interest rates cuts by the Reserve Bank, possibly as soon as Melbourne Cup day,’’ he said.

The government was ‘‘obviously struggling’’ to get back to a sustainable surplus situation ‘‘but I don’t think there’s much they can do at the moment,’’ said Mr Mumford.

RBC Capital Markets senior economist Su-Lin Ong said the budget surpluses were "well within forecasting error" and added pressure for another rate cut in November.

"They’re pretty wafer thin these surpluses," she said. "The underlying message, very clearly, is that the fiscal stance remains extremely tight."

Growth was scaled back slightly in the budget update with the government forecasting an economic expansion of 3 per cent, rather than 3.25 per cent tipped in May.

Ms Ong said the fiscal policy would drag on activity, at a time when the economy was softening.

"With the labour market is weakening, that’s going to keep pressure on the RBA to cut further," she said. The jobless rate ticked up to 5.4 per cent in September from 5.1 per cent, with many economists forecasting unemployment to rise by the end of the year.

Last modified onTuesday, 28 May 2013 09:23

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