Rate Cuts Still on Agenda

Despite a flutter of slightly better Australian data in recent days (consumer sentiment is up a bit, retail spending is less bad than it was a few months ago, housing finance is nudging higher and we saw another wonderful trade surplus), there is no doubt the RBA needs to keep on cutting interest rates. The reasons are simple.

Inflation is already in the lower half of its target band and there is a serious risk it breaks lower in 2012; global economic conditions look chronically bad with the eurozone spluttering, the US cratering, Japan mired in deflation and the UK and Canada weak. We now have clear signs that China is cooling - perhaps rapidly. This risks for Australia are significant.

Australian interest rates are still very high. They need to be lowered. This morning, the market is pricing in a 3.5% cash rate by March 2012 and is flirting with a sub-3.0% cash rate during the second half of 2012. Even I think this may be a little aggressive, but if I am wrong with my call for a 3.5% cash rate by June 2012, I'm pretty sure it will be because the RBA has been cutting more and earlier than I thought. The market just might be right.

It is worth noting also that interest rate cuts are free. There is no cost to the Budget with a cut, they can be added to easily and if things look better than expected, they can be reversed.

Right now, the policy onus is on the RBA and not the government. This might change if we get a fully blown global recession, but for now, it's all eyes on the RBA.