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    Rate cut likely as growth falling short

    Author: Colin Brinsden, AAP Economics Correspondent Source: AAP
    Thursday 5th April 2012

    Few can remember his name, but Glenn Stevens will be the toast of the nation if interest rates are cut next month - at least among borrowers.

    An opinion poll this week found that only one in 10 respondents could correctly name the Reserve Bank of Australia governor.

    Four in 10 were close: "Glenn eh ... " or "Steve um ... ".

    The rest, 86 per cent, named someone else, or didn't know at all.

    Given the amount of flack the governor gets as the nation's most influential public servant on interest rates, it's a staggering result.

    Still, 83 per cent of those who did know his name thought Stevens was doing a good job.

    That figure may swell, especially with borrowers, if, as seems increasingly likely, the central bank cuts the cash rate at its next board meeting on May 1.

    Stevens was unusually candid in his post-board meeting statement on Tuesday following its decision to leave the official cash rate unchanged at 4.25 per cent, a move widely expected by economists.

    "The board judged the pace of output growth to be somewhat lower than earlier estimated," Stevens said.

    "(It) also thought it prudent to see forthcoming key data on prices to reassess its outlook for inflation, before considering a further step to ease monetary policy."

    The consumer price index for the March quarter will be released on April 24, a week before the May board meeting.

    Since making cuts in November and December the central bank has felt its rate setting as appropriate given that economic growth is deemed to be close to trend - usually seen at around 3.25 per cent - and underlying inflation close to the mid-point of its two to three per cent target band.

    That said, it also repeatedly has said that should demand conditions "weaken materially", the inflation outlook would provide scope for lower interest rates.

    The big question mark for economists had been what constitutes "weaken materially" in the eyes of the central bank.

    As it was, a number of speeches by the RBA, including by Stevens, his deputy and assistant governors, since the March board meeting did not suggest that it was about to throw in the towel on its claims that the economy was growing at trend.

    Even so, Macquarie Research divisional director Brian Redican says the statement does suggest there has been a considerable shift in the central bank's view during the past month.

    "Up until now, the RBA has been suggesting that any weakness in demand was temporary and so didn't need a policy response," he said in post-meeting analysis.

    "That no longer seems to be the view."

    While Redican does not think actual economic data has got much weaker in the past month, the RBA's clearly believes it has.

    Yet, a number of business leaders, lobby groups and unions have been demanding a rate cut, and believe the Reserve Bank should have acted already.

    High-profile businessman Solomon Lew, himself a former RBA board member, last month accused the central bank of being out of touch, and demanded an immediate, hefty rate cut.

    "I really believe that the Reserve Bank has mishandled the mining boom to the great detriment of the non-mining sector," said the Premier Investments chairman, noting especially that retail was one of the key drivers of economic activity.

    The housing industry also repeatedly has called for rate cuts, as have business lobby groups, such as the Australian Chamber of Commerce and Industry.

    Interestingly, RBC Capital Markets economist Su-Lin Ong also points out that Heather Ridout, the former head of another peak employer group that has its roots in the manufacturing sector - the Australian Industry Group (Ai Group) - joined the RBA board as an external appointment in February.

    "Ridout has been exceptionally vocal in recent years over the decline in the industry, job shedding, and the numerous challenges facing manufacturing including the structurally higher Australian dollar and rising labour costs," Ong said.

    Coincidentally, the March reading of the Ai Group-PriceWaterhouseCoopers manufacturing index, released on Monday, dipped below the 50-point mark.

    That indicates industry is again in contraction after an all-too-short period of expansion between December and February.

    More broadly, the run of key data since the March board meeting has been fairly lame to say the least.

    Economic growth in the December quarter national accounts slowed to a snail's pace, more up-to-date data for employment unexpectedly fell, retail spending remained limp, and building approvals dropped sharply.

    And for good measure, the nation recorded its second consecutive monthly trade deficit in February in data released the day after the April board meeting.

    It was only the third monthly trade shortfall in about two years.

    While this year's trade gaps have been largely the result of adverse weather conditions affecting ports, it does suggest net exports - the ratio of exports to imports - will make a significant contraction to the March quarter national accounts.

    So economists expect, as long as price pressures are tame in the March quarter CPI report, a rate cut will be on the cards.

    All eyes will be on what's-his-name on May 1.



    Tags: BG, Economy
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    Based on information provided by and with the permission of the Western Australian Land Information Authority (2014) trading as Landgate.