RBA tipped to cut rates

Tumbling mining profits and deepening concerns over the strength of China may today force the Reserve Bank to take interest rates lower than they were during the Great Depression.

But signs of a Sydney housing-bubble will continue to weigh on the central bank as it attempts to lift the economy.

The Reserve sliced interest rates by a quarter percentage point last month, with markets putting the
chance of a follow-up cut at better than 50 per cent. Such a move would take the official cash rate to just 2 per cent.

For a person with a $300,000 mortgage, such a cut would save about $50 a month.
Figures from the Australian Bureau of Statistics yesterday spelt out the problemspointed towards the headwinds facing the economy.

The mining sector recorded pre-tax company profits of less than $4.6 billion in the three months to the end of December, It was the smallest quarterly profit recorded by the sector since early 2005.

And mining lost its position as the most profitable sector, eclipsed by the rental and real estate sector which has been buoyed by falling interest rates.

Those rates have been parlayed into higher housing prices, particularly in Sydney where median house values jumped another 1.6 per cent through February.

It’s a different story in Perth, with RP Data-CoreLogic reporting house values in the WA capital fell by 2.3 per cent in the month. Over the past year, values have inched up by just 0.7 per cent, well short of the rate of inflation which stands at two per cent.

Wages are also struggling, with bureau statistics showing that total incomes grew slower than inflation through recent months.

Another issue facing the Reserve Bank is the slowdown underway in China. The central bank there at the weekend cut interest rates for the second time in three months in a bid to boost economic activity.

As Australia’s largest export market, any sign of trouble in China will be taken as a key threat to the Australian economy.

Even petrol prices are adding to the Reserve Bank’s concerns, with the fall through January now fully reversed. Average petrol prices in Perth are now back to where they stood in mid-December.

Commonwealth Bank economist Gareth Aird said while the lift in the housing sector was a positive, it could be too much of a good thing if they simply led to higher prices.

“Notwithstanding, we don’t expect that activity in the housing market will stand in the way of a rate cut at today’s RBA meeting,” he said.

“But the house priced-to-income nexus will probably make the RBA reluctant to cut beyond 2 per cent.”