Will the next rate cut move the needle?

Interest rates are on the way down, whether they are cut today (as most economists expect) or in the coming months. The question is: Will another rate cut finally help consumers and businesses get out of their funk?

So far, there is relatively little evidence that the rate cut has had much of an impact on households, who certainly haven’t rushed out to spend the money left in their pockets from lower mortgage payments.

“If the Reserve Bank had been hoping that the rate cuts before Christmas would buoy consumer confidence and support spending over the festive season it would be disappointed,” CommSec economist Craig James wrote yesterday after retail sales data showed turnover fell by 0.1% in December and were up just 2.4% over calendar 2011.

It was the weakest growth rate in 50 years, according to James.

“It is clear that the Reserve Bank underestimated the conservatism of consumers over the past year.”

It’s not hard to see what households have been doing with the extra money from the the rate cuts – the household savings ratio is currently at a 24-year high.

Eventually, higher savings will lead to increased spending as households become more comfortable. But the question is when. Will another rate cut do enough to help end what Craig James calls a consumer “strike”?

It will take at least six months, James says.

“While the rate cuts will support activity, overall it is likely a sluggish consumer spending environment will dominate the economic landscape over the first half of 2012.”

That’s consumers. What about businesses?

That’s more a mixed bag. Today’s Business Expectations data from Dun & Bradstreet showed businesses are as confident as they have been about sales growth in eight years, although actual conditions are still reasonably sluggish.

According to the D&B figures, in the December quarter, 40% of businesses saw sales increase, 18% saw sales fall and presumably the remainder were flat. Quite why businesses are so excited about sales in the March quarter is not clear.

The rate cuts we’ve seen so far have done little to get businesses spending either. Just over 30% of businesses said they are planning to increase their cash reserves during the June quarter of 2012, while two thirds of firms said they will avoid new lines of credit.

The message here is that the impact of the next rate cut might not be as big as we hoped.

Households and consumers are, like many parts of this heavily indebted world of ours, still in the process of deleveraging and will continue to pay down debt and save until they feel comfortable.

This recovery is still going to take time.