Business groups hail rate cut – and there’s more on the way

Business groups have hailed the Reserve Bank’s decision to cut interest rates by 0.75% yesterday, although concern about a sharp and deep economic slowdown is growing.

Business groups have hailed the Reserve Bank’s decision to cut interest rates by 0.75% yesterday, although concern about a sharp and deep economic slowdown is growing.

The magnitude of the rate cut surprised many economists, who had been expecting a 0.5% cut. The official cash rate is now 5.25%, the lowest level since March 2005.

In his statement following the decision, RBA Governor Glenn Stevens painted a picture of a slowing global economy, turbulent financial markets, plummeting commodity prices and plunging exchange rates.

Perhaps most worrying was this line, which hints at an economic slowdown far sharper than the RBA predicted: “On balance, it appears likely that spending and activity will be weaker than earlier expected.”

Entrepreneurs and mortgagees can look forward to more interest rate cuts in the next few months, with economists tipping the RBA could cut again in November.

JP Morgan chief economist Stephen Walters points out that the RBA is cutting rates at the most aggressive pace “since the ugly recession of 1991” when the RBA also slashed the cash rate by 2% over three months.

“We expect further rate cuts totalling 1.25% by the second quarter 2009. The RBA is front-loading the interest rate relief – we now expect a 50 basis point rate cut in December.”

Westpac chief economist Bill Evans agrees. “We expect that the next move will be a 50 basis point cut on 2 December, laying the foundation for a low point of 4% by March next year.”

Australian Industry Group chief Heather Ridout described yesterday’s cut as a “big step in the right direction”.

“Industry endorses the decision by the RBA to reduce interest rates by 0.75%. Coupled with the reductions announced over preceding months, this means an effective rate reduction of 2% since September this year. Australian business is being deeply affected by the global downturn in economic activity, which looks set to worsen.”

Australian Retailers Association head Richard Evans hailed it as an early Christmas present for his struggling sector.

“Hopefully this will help turn consumer confidence around and start the upwards trend for retail spending after successive months of stagnant and declining growth. Consumers have the economy in their hands at the moment,” he says.

“The RBA has cut interest rates over three consecutive months and the Rudd Government’s $10.4 billion stimulus package is putting cash back into consumer’s pockets. But now it’s up to consumers to re-enter the marketplace, spend responsibly and allow funds to flow through the economy.”