The federal Budget has created compelling evidence for the Reserve Bank to cut interest rates - rather than raise them - by year end, according to a former RBA employee.
The government’s plans to undertake a notional fiscal tightening of 1.3 per cent of GDP in the 2015 financial year represent a weighty argument for a rate cut, Credit Suisse research analyst and former RBA employee Damien Boey told MortgageBusiness.
While residential investment may carry the economy in the next couple of quarters, building approvals have peaked by cyclical standards, he added.
“They are actually going to fall from those elevated levels,” Mr Boey said, “so residential investment cannot provide a permanent fix.
“Government spending was part of the fix, but it’s not happening.”
Mr Boey said there are more signs pointing to a rate cut than a rate rise by the end of 2014.
“Even if core CPI inflation starts to remain stubbornly high, say 2.5 to 3 per cent, the RBA could still cut in that environment for two reasons,” he said.
“Unemployment will be rising and CPI will be driven up by basic cost of living such as utilities and petrol, all those things that rates don’t actually affect.
“If anything, rises in prices of those essential items is actually causing tightening again for households, which is contributing to the slowdown.
“Even now, I think there is more compelling evidence for rate cuts than rate hikes.”
Australian Property Monitors senior economist Dr Andrew Wilson believes rising unemployment could see the Reserve Bank cut the cash rate.
“The predictions in the Budget were for unemployment to rise to 6.25 per cent over the next financial year and economic growth is set to remain well under
trend at 2.5 per cent annually,” Dr Wilson said.
“These are conditions that reflect an economy that is continuing to shed jobs and certainly one that is not growing,” he said.
“I was never a believer that we would see rates rise, but that card is now completely off the table since the Budget predictions.”
Even with rates already low at 2.5 per cent there is a chance of another cut, Dr Wilson said.
“Particularly with economies such as Brisbane, Hobart, Melbourne and Adelaide, with unemployment over 7 per cent it’s not really the environment to raise interest rates,” he said.
“If those unemployment rates continue to rise, particularly in Melbourne, there’s a case for cutting interest rates again.”
However, not all economists agree.
AMP Capital had penciled in a rate rise by year end. Speaking at an ASFA Budget luncheon in Sydney yesterday, AMP Capital chief economist Shane Oliver said there is not enough in the Budget to change his prediction.
“But obviously there is a risk that if there’s so much talk about the doom and gloom – the eventual welfare cutbacks and so on – that the Reserve Bank might feel ‘well, we’re better off waiting for that rate hike until next year’,” Mr Oliver said.
“So it could, over time, help to reinforce relatively low interest rates in Australia, and at least help to delay rate hikes – although not dramatically,” he said.
"The bottom line is interest rates staying at pretty low levels.”