14 June 2024
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Will a rate cut come swiftly?

Peter Switzer
6 June 2024

The latest ‘take’ on our slowing economy makes me think that the next range of economic indicators (like economic growth and inflation) that could KO talk of interest rate rises and prompt speculation about a cut, won’t be influenced by ‘hot’ racing cars and the irrepressible Taylor Swift! More on those magnetic marketing machines later.

Back to the economic ‘stuff’ and sometimes I regret that I am committed to telling what I see as the economic and market investing truth because there are times when it would be better if I didn’t inform the economically untrained and simply let media headlines determine the attitude of borrowers, consumers and business proprietors. This conflicted thought came to me when I was asked to explain a story in The Australian by Patrick Commins for the 2GB breakfast audience.

The headline read: “The RBA ‘won’t hesitate’ to hike rates as economy stalls in early 2024.”

Now that’s a great message to get out there to scare those spenders (who are also borrowers) who are helping to keep inflation above the 3% level. I want interest rates to fall to help rate sufferers and to see stocks rise so the super funds of my financial advice clients keep heading higher.

I’ve also been arguing that our economy is slowing faster than those economists who have been calling for a rate rise. And yesterday’s March quarter economic growth number makes me look accurate on how the 13 rate rises are biting the economy.

On that subject, I’ve been arguing/gambling that a rate cut on Cup Day is a chance if the economy proved to be slower than has been thought in recent months. Yesterday’s 0.1% growth number for the months January to March indicates that I could be on the money with my rate cut call. I do say “could”, but I reckon the June quarter is bound to be slower than the March quarter because:

  1. There are no post-Christmas sales in the June quarter.
  2. More people will be affected by the mortgage cliff by being forced off low fixed rate home loans on to higher variable rate loans.
  3. Retail sales have been plummeting lately; and
  4. Apart from home prices, few indicators tell us that confidence is rising.
  5. In fact, the low levels of consumer confidence we see now are akin to what prevailed in the 1990-91 recession.

As Patrick Commins reported: “National accounts figures on Wednesday revealed the economy expanded by just 0.1 per cent in the March quarter, dragging annual real GDP growth down to 1.1 per cent – its slowest since 1992.”

Putting these statistics and what RBA boss Michele Bullock said to a Senate committee about not being afraid to raise rates creates a scary headline for readers with big loans. But those people need to know the media can sometimes play tricks on readers.

Commins actually tells us that Ms Bullock told us she could raise rates before she saw the economic growth number. And anyway, she was just telling the politicians in the Canberra meeting that she would raise rates if the economic data on inflation says she should.

However, that data yesterday suggests the economy is slowing faster than expected. That could mean inflation could follow by falling in coming months. If that happens, the RBA could be cutting on Cup Day. To be honest, if the data doesn’t point to lower inflation the RBA could raise rates.

I learnt many decades ago that what I wrote and what the sub-editor used as a headline could be at odds with what I was really trying to say. These people win awards for their headlines, so it becomes a goal to attract readers. And scary headlines work better than happy, positive ones.

Ms Bullock did tell the pollies that the $300 energy rebate to reduce the real price of energy wouldn’t be a big influence on what the RBA does, even if it has a small reduction effect on inflation. She also said the rebates weren’t likely to push up spending and prices.

She was objective, virtually saying if the economic data says inflation is rising, the RBA will raise rates and vice versa.

Helping my argument that the economy is getting slower, so a rate cut is more likely this year are the following:

  1. CBA analysis says interest payments made by mortgaged households climbed again to be 30% higher than a year earlier and are 170% up on pandemic lows when the RBA slashed the cash rate to near zero.
  2. “Household disposable income, adjusted for inflation, dropped in the March quarter to be 0.4 per cent lower than a year earlier,” Commins reported.
  3. Commins also told us: “Westpac senior economist Matthew Hassan said the revision implied Australians had run down as much as half of the $250 billion in extra pandemic savings, versus a previous estimate of 20 per cent.”
  4. And finally, the March quarter had the blockbuster events of the Formula 1 Grand Prix and the sensational Taylor Swift tour that actually pushed up consumption in that quarter!

No more hot singers and racing car drivers might help cool down the economy and permit Ms Bullock to cut rates before the end of the year.

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