It’s been 19 months since the RBA first started cutting back interest rates and, according to AMP Capital chief economist, Dr Shane Oliver, the response has been ‘sub-par’.
This lack of investor enthusiasm has led to whisperings of the R-word and fears that the Australian economy has been artificially propped up by the mining boom, which boosted national income and in turn, underwrote a boom in residential property prices.
“With the mining boom fading,” says Oliver, “commentators argue that the economy will collapse and unemployment will surge, triggering a sharp increase in mortgage delinquencies and a collapse in house prices - ultimately leading to huge problems for the banks.”
However, while Oliver admits that recession is a risk, he says there’s still ‘plenty of scope’ for lower interest rates and a lower Australian dollar to boost the economy.
“Just as high interest rates and a high A$ put many non-mining sectors of the economy into hibernation over the past few years to make way for the mining boom, this will now go into reverse, allowing the pressure to come off these sectors and the economy to return to more balanced growth in 2014, led by the laggards of the past few years such as housing, retailing and domestic tourism…As a result, we put the risk of recession – in the absence of a sharp global slump which seems unlikely – at a significant but low 15-20%.”
Yet, Oliver says it’s likely the RBA still needs to do more to reduce the cost of borrowing, since bank lending rates are ‘still not low enough’ if equilibrium levels for interest rates have fallen.
“Lower rates are needed to ensure that the A$ continues to fall. We expect the RBA to cut the official cash rate to 2.5% in July/August and to 2.25% in September/October and for the A$ to fall to around US$0.80 over the next few years.”