Regional markets to gain from interest rate cuts

AUSTRALIA is not in a housing bubble – certainly not on the Sunshine Coast.

AUSTRALIA is not in a housing bubble - certainly not on the Sunshine Coast.

Speaking at Maroochydore, BT Financial Group chief economist Dr Chris Caton said rising house prices were a capital city story and regional markets would benefit from any further interest rate cuts.

There is virtually no impediment to the Reserve Bank of Australia cutting interest rates again next week following the mild rise in inflation in the past quarter.

Dr Caton said the Australian economy was growing, just not rapidly.

And a further rate cut would help restore the confidence that had been lacking for the best part of a year, he said.

His comments have been reflected by CommSec chief economist Craig James, who expects the RBA to cut rates to an historical low of 2% this Tuesday.

Dr Caton said the high Australian dollar had been an inhibitor to growth but it had come down and was expected to finish the year even lower.

"The RBA's decision to cut rates in February could in no way be meant as a one-off," he told a Covey Associates breakfast meeting at Maroochy Surf Club.

"The plan is to cut again.

"Has enough changed for that to take place next week?"

He thought it probably had, and that it was being regarded as a live meeting - that is, a further cut would be very much on the agenda.

General confidence was lacking in the Australian economy and, going into the 2015 Budget, Dr Caton did not expect it to be so negative.

He said the Federal Government was expected to hit the reset button and try to claw back the ground lost in the past year.

"Business confidence has been low," Dr Caton said, "not because the economy is not growing, but sluggish.

"Australia had a mild GFC and we are working through that now.

"There is no downturn but, sooner or later, business will have to invest.

"Business has been about cost cutting and not about expansion.

"That can be self-perpetuating rather than self-fulfilling."

CommSec's Craig James said the latest data from the Australian Bureau of Statistics had revealed the Consumer Price Index, the key measure of inflation, rose 0.2% in the March quarter.

This means the CPI climbed by just 1.3% in the 12 months to March 2015, far below the RBA's 2%-3% target band range.

Interestingly, despite the sharp slide in the Australian dollar in the March quarter it did not have a significant impact on lifting imported inflation - at least, not yet.

"Looking across the contributors to inflation," Mr James said, "the seasonal lift in education and domestic accommodation were among the key drivers of any lift in inflation while the fuel price recorded a 12.2% decline in the March quarter.

"Whichever way you cut it inflation is not a threat to the economy. Policymakers will focus more attention on the labour market, shifts in the Aussie dollar and retail activity in coming months."

Meanwhile Dr Caton scotched talk that Australia was in a housing bubble.

"It's not happening here on the Sunshine Coast," he said.

"If it is happening, it's in Sydney with investors. If the activity in Sydney and Melbourne is a problem, raise rates. Yet the rest of the economy does not need that."