Economists divided on the next interest rate cut

INTEREST rates have finally moved lower, but questions have emerged exactly how quickly the RBA will deliver further cuts.

INTEREST rates have finally started moving lower, but questions emerged yesterday exactly how quickly the Reserve Bank of Australia will deliver further cuts.

Bank governor Glenn Stevens warned the nation that "opposing forces" were at large in the economy, which market observers believe may prompt the bank to take a more cautious approach to further cuts.

Economists had initially forecast back-to-back 0.25 per cent interest rate cuts in September and October but speculation grew yesterday the bank may wait until November before cutting rates again.

CommSec chief equities economist Craig James said the RBA's accompanying statement "gives no hint" of an October rate cut and that November was the most likely date for the next movement down.

While most economists question the speed at which the RBA will cut rates, they still expect this cycle will see the official cash rate fall to 6 per cent within a year and move as low as 5.5 per cent in 2010.

A peak business lobby group, The Australian Chamber of Commerce and Industry, slammed the big banks for failing to pass on the first interest rate cut in almost seven years to all credit card and business customers.

Bendigo and Adelaide Bank was the only institution to pass on the full rate cut to all customers.

ACCI said the RBA's reduction was a move "in the right direction" and should be passed on in "full" to business consumers.

"Relief offered through official interest rate reductions is necessary to minimise the risk of job losses in the face of slowing demand," ACCI director of economics Greg Evans said.

The big banks all passed on the rate cut in full to home owners, with NAB yesterday the only one of the big four to confirm it would lower its business and margin loans - but not until September 22.

Westpac, CBA and ANZ said business loan levels were under review.

In his statement Mr Stevens noted that fixed-investment spending by businesses remained strong.

"At the same time, high prices of oil and a range of other commodities have added to global inflationary risks," he said. "They are also dampening growth in a number of countries.

"Given the opposing forces at work, considerable uncertainty has surrounded the outlook for demand and inflation."

NAB chief economist Alan Oster said while the tone of the RBA statement was "neutral", it was certain to cut rates again before Christmas, followed by further downgrades early next year to see rates at 6 per cent by mid-2009.

The RBA statement noted that business investment and profits had surged, underwritten by China's seemingly insatiable appetite for Australian commodities.

"On balance, however, it is looking more likely that household demand will remain subdued and overall economic growth slow over the period ahead," the RBA said.

"Inflation is likely to remain relatively high in the short term, with the CPI affected by the high global oil prices mid-year and other increases in raw material prices."

Citigroup director of economics Shane Lee said the slowdown in household spending was sufficient to see inflation fall back to within the target band of 2-3 per cent growth by 2010.

"We retain the view that the RBA will lower the cash rate in November and February 2009," he said.

But investors were subdued in the face of the growing uncertainty about the timing of the next rate cut with the S&P/ASX 200 index closing flat at 5116 points.

Despite a small bounce after the RBA announcement, the Australian dollar quickly slipped to a low of US84.34c - just above its year low.

AMP Capital Investors chief economist Shane Oliver said one rate cut won't drastically improve the economy but added that it was a move in the right direction.

"Rate cuts are good news for the economy," Dr Oliver said.

"The recent run of economic data and anecdotal evidence suggests the significant slowdown in domestic demand the RBA has been looking for in order to slow inflation is under way."