Strange Times Ahead for Aussie Economy; Indicators Pointing to Possible Interest Rate Cut

Article excerpt

AUSTRALIA is about to discover if it really is the Wonder Down Under a an economy growing at a stronger pace than most, but still able to cut interest rates.

The prospect challenges basic economic logic, but that's the happy circumstance in which the nation could find itself.

Economic growth data due next Wednesday is likely to show a solid rise in September quarter gross domestic product (GDP) of about 1%, on top of 1.2% growth in the June quarter.

Other reports show retail spending has grown at its fastest quarterly pace in over a year, engineering construction has soared by almost 23%, and business investment has jumped by over 12%.

Export earnings from resources and energy also struck a record of close to $49 billion in the three months to the end September.

And looking ahead, business investment plans have been ratcheted up even further to stand at a record of just over $158 billion for the whole of 2011-12.

This is all pretty heady stuff, even though there are still a few more GDP indicators to come in the early part of next week a company profits, government finances, balance of payments and the usual awild carda of business inventories, such as stock on shelves and in warehouses.

Yet, despite the apparent strength in the economy, there is a strong chance the Reserve Bank of Australia (RBA) will follow up on its November cash interest rate cut, with another reduction when its board meets 24 hours before the national accounts are released.

Heading into the weekend, financial markets are betting on a near 80% chance of a cut in the cash rate to 4.25% from 4.5% next Tuesday.

HSBC Australia chief economist Paul Bloxham expects the rate decision will ago down to the wirea.

aOn domestic grounds, the RBA would not be considering another rate cut,a Mr Bloxham said in a client note yesterday.

aBut the global outlook is shaky.a

Underlying inflation is sitting comfortably in the 2 a 3% target zone, and the central bank expects it will remain that way for the foreseeable future, suggesting there is ample scope for the RBA to consider cutting rates if it needs to.

But Mr Bloxham expects the central bank could wait until it gets more information, particularly the December quarter inflation report that is due in late January before deciding to move on rates again. …


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