November 3, 2008 / 1:46 AM / in 9 years

Grim Australia economy news seen a rate cut clincher

SYDNEY (Reuters) - A rash of grim economic news from Australia on Monday looked to have set the seal on a further cut in interest rates this week and suggested even deeper reductions would be needed if the economy was to avoid recession.

The Reserve Bank of Australia (RBA) holds its monthly policy meeting on Tuesday and is widely expected to cut the key cash rate by half a percentage point to 5.5 percent, bringing its easing since September to an aggressive 175 basis points.

“It all emphasizes the importance of having lower interest rates,” said John Edwards, chief economist at HSBC.

“If you saw this kind of weakness persisting through the first half of next year you would be looking at rates of 4 percent rather than 5 percent,” he added.

Investors reacted by pricing in a greater chance of lower rates in the future with bill futures implying a cash rate of under 4.5 percent by June next year.

Still, a round of poor economic data had already been anticipated by many given the scale of global turmoil in recent months and the Australian dollar escaped with no damage.

Retail sales sank 1.1 percent in September, twice what analysts had forecast and the biggest drop since April 2005.

Adding to the angst was a sharp 1.8 percent fall in national house prices in the third quarter, a hit to household wealth already battered by sliding share values.

“Given the wall of worry the consumer has been climbing over the last few months, weakish retail spending is not surprising,” said Michael Blythe, chief economist at Commonwealth Bank.

“Things are unlikely to get better in the near-term with concerns about the economic outlook and the labor market weighing down on the consumer side of things,” he added.

EMPLOYERS RETRENCH

A sign of what might be in store for the labor market came from Australia and New Zealand Banking Corp’s monthly survey of job advertisements.

That showed a steep 5.9 percent drop in October, the sixth month of losses and the biggest fall since early 2001.

Su-Lin Ong, a senior economist at RBC Capital Markets, said the figures suggested unemployment would likely rise to between 5.5 and 6.0 percent by the end of next year, from just 4.3 percent currently. Government data on jobs is due out on Thursday.

“This will keep confidence, spending and borrowing under pressure, and almost guarantees a further weakening in Australia’s growth pulse,” said Ong. “We expect the RBA to cut the cash rate to the historic low of 4.25 percent by mid-2009.”

On the positive side, there were signs that inflation was set to recede more quickly than many anticipated, giving the central bank plenty of scope for remedial rate cuts.

A monthly gauge of inflation from TD Securities and the Melbourne Institute showed a 0.2 percent drop in October, the first fall in almost three years.

Annual inflation slowed to 3.9 percent, from 4.5 percent in September, the first dip below 4 percent since January.

“The gauge signals quite starkly the speed at which the inflation problem of the last few years is unwinding,” said Joshua Williamson, senior strategist at TD Securities.

“The momentum is such that inflation is on track to reach the RBA’s target range by the middle of 2009,” he added.

Such an outcome would be a huge relief for the RBA since it had predicted inflation would not return to its target of 2 to 3 percent until late 2010.

Editing by Jonathan Standing

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