Rate cut odds shorten but still unlikely - this month

The Reserve Bank meets for the first time this year on Tuesday with the likelihood that official rates will remain at the current record low 2 percent over February.

However a cut in rates by the Reserve Bank this month would be a surprise rather than a shock given data released over recent days.

Latest US GDP data recorded disappointing growth over the December quarter which has lengthened the odds of a near-term follow-up increase in interest rates by the US Federal Reserve Bank.  A higher US dollar as a consequence of improved US growth and higher interest rates was a positive prospect for the Australian economy, putting downward pressure on a stubbornly high local currency and improving the competitiveness of exports.

Latest consumer price index data for Australia was also disappointing and reflects an economy grinding to a halt with no prices pressure emerging as a consequence of stagnant growth.

Concerns regarding overheating Sydney and Melbourne housing markets are now clearly misplaced with Sydney prices falling by record levels over the December quarter.  Melbourne also recorded sharply lower growth rates to end the year.

The prospective performance of the international economy generally is on the slide particularly in relation to growing concerns over the direction of the previously booming Chinese economy.  Interest rates in Japan have now moved into negative territory as that economy continues its seemingly never-ending search for a sustained revival.

The Eurozone is increasingly confronted by the costs of an unprecedented surge in refugees and the political uncertainty set to evolve as a result.

Global share markets have experienced a rocky ride this year with local equities clearly fragile and now well below recent levels.  Unlike most other share markets, Australia stock market performance remains well below pre-GFC levels.

Locally signs are emerging that the peak of the recent residential building boom has passed with other sectors of the economy to be relied on now to pick up the baton.

With Australian rates still well above international levels the Reserve Bank has the scope to cut rates putting downward pressure on the dollar and potentially stimulating local consumer and business investment activity.

The government has recently acknowledged that economic growth is likely to be lower than expected and placing more pressure on a rising federal deficit.  The forthcoming budget as a consequence is likely to include increased taxes and cost cutting measures – despite the election year.

On the positive side, latest employment data signals some improvement in the jobs market with unemployment remaining below 6 percent over December.

The Reserve Bank may more than likely opt to keep its powder dry over February until data reflecting this year’s economic performance becomes available over the next few months.  But don’t be shocked if the Bank – as it did last February – decides to take an early-year pre-emptive strike this Tuesday in an attempt to keep the growing bears at bay.

Dr Andrew Wilson is Domain Group Chief Economist Twitter@DocAndrewWilson – My Property 2UE Fridays 2-3pm, Saturdays 1230-1pm