Bravo Messers Carr and Cooke!

In February this year, we ran an article on our website about the prospect for interest rates. Counter to the arguments at the time it was titled “Interest rates to ease by end of 2008”. We based this claim on statements by two economists - Adam Carr of UBS and Andrew Cooke of Goldman Sachs-JBWere.

Speaking at a conference in Sydney in February this year, Cooke said he would "throw out the controversial point" that rates may be easing as we get to the end of 2008 even though the Reserve Bank (RBA) has signalled very strongly that further interest rate rises are likely. He argued that "as we go through the remainder of the year, consumer demand may slow too much…so things [might] change pretty quickly.

At about the same time Adam Carr, senior economist at UBS, was making similar, wild claims stating, “inflation isn't really our [the consumers] fault and that crunching demand through tighter monetary policy [higher interest rates] is only part of the answer". At the time Carr was concerned that to curb inflation the nation was faced with the challenge of a significant, policy induced slowing of growth (and rising unemployment) just as the global economy is slowing and credit markets are contracting in the wake of the US sub-prime mortgage crisis. Talking later on the ABC Radio program, “Counterpoint” Carr was concerned that the RBA would be faced with the need to quickly reverse its stance on monetary policy to avoid stalling the economy.

This indeed is what now seems to be happening. On the back of some seriously bad economic data, several commentators are now saying we can expect rates to fall by the end of this year. Some are even talking recession. Although it should be noted that many of these same commentators were predicting that rates would still be rising at this time. Remember it was only several weeks ago that ANZ came out and said that we were facing one or two more rate rises before this Christmas. While the ANZ still feel that rate cuts are not due until early next year, they have certainly backed away from their earlier forecast.

Conditions now are looking so different to that of a few weeks ago that Terry McCrann believes that when the RBA meets on Tuesday next week what we are likely to see "is a very clear statement that the economic and policy cases have now been made for a shift to lower interest rates” and that “a rate cut at the September meeting …is certain. [Further] it won't be the last and it could be a half of 1 per cent[!]”

However its not yet that clear a picture. In the same week of the news about the sharp slump in retail sales, a fall in borrowing, decreasing house prices, and stretching payment terms, The TD Securities-Melbourne Institute monthly inflation gauge was released stating that inflation rose 0.4 per cent in July, after a 0.5 per cent increase in June. Annual inflation ticked down to 4.6 per cent from a record high of 4.8 per cent the previous month – still well above the RBA target band of between 2 and 3 per cent.

Earlier this year the RBA needed to tap the interest rate brake on inflation. Painful though it has been no one would argue with that. What seems to be happening now is that they have come to the conclusion that they may have tapped the brakes once or twice too many. To stop the economy coming to a halt and perhaps even going into reverse (a recession), we’re going to get a nice little surprise just before Christmas – if the pundits are right, the RBA will lower rates sometime between September and December this year. Bravo Mr. Carr! Bravo Mr Cooke!

(references: EquityLend.com.au, Feb 14 2008; HeraldSun, 1 Aug 2008; smartcompany.com.au, 1 Aug 2008)