How low for rates?

For once markets and just about every economist post Glenn Stevens’ comments at a speech a couple of weeks earlier, were unanimous with their cash rate cut prediction and the Reserve Bank delivered that rate on 6 August. While the cut to 2.5% brings the official cash rate down to the lowest since the Reserve Bank’s inception in 1960, the record low is not surprising given our sluggish economy and a global environment with record low rates in the developed world and quantitative easing programs pushing rates down even further. Pleasingly, the unemployment figures released on 8 August showed unemployment stable at 5.7% with most economists expecting a pick up to 5.8%. Perennial’s base case forecast for interest rates as shown in the light purple line below sees rates remaining low until the latter half of 2014. Futures markets are currently more negative about our economy pricing in at least one and possibly two more cuts over the next 10 months. Interestingly, despite talk of a tougher Government fiscal stance in the May Budget, the August Economic Statement (released 2 August) update has already seen the projected budget balance for 2013/14 slip from -1.3% to -1.9% of GDP, effectively a 0.6% fiscal easing. The bottom line - expect low rates for the next 12 months.

CHART 1: Australian Cash Rate & 30 Day Interbank Cash Rate Futures

Source: Bloomberg, Perennial.

Indices:

The Australian All Ordinaries Index has moved up increasing +0.4% since closing last Friday to 03:00 pm today.

The rest of the world as measured by the MSCI index increased +2.5% in A$ from closing last Friday to end of trade Thursday.

Have a great weekend,

The team at IPS