Rate Cut Urgently Needed: Business Confidence & Consumer Sentiment Limp Along

The last two days have seen the monthly updates on business conditions and consumer sentiment.

Both seem to be locked into a groove below their long run averages which unsurprisingly, is consistent with the economy rolling along at a little below trend. This latter point was confirmed last week when the national accounts confirmed GDP growth at just 2.3% through the course of 2011 and we saw another poor employment report.

In the NAB survey, business confidence fell 3 points to be +1; while business conditions rose 1 point to +3. Both measures are below their long run averages. If we were to take out the mining sector, both confidence and conditions would be negative.

Consumer sentiment is in a more parlous state. The Westpac-MI index of consumer sentiment fell 5.0% in March to be at 96.1 points which again is well below its long run average and consistent with quite moribund levels of spending. It is actually not that far from levels normally seen during consumer recessions.

These results, on top on the other numbers in recent weeks suggest that monetary policy should be tweaked to the easy side – that is, there probably should be AT LEAST another 50 basis points of rate cuts sooner rather than later as the mining and resources boom does not provide enough impetus to offset the general weakness elsewhere.

The RBA knows too well that fiscal policy will unambiguously be restrictive, the AUD is over-valued and therefore acting as a hand break on the economy and that interest rates are at best, neutral.

While the RBA clearly should have cut in February and/or March, all is not lost. The next RBA Board meeting is 3 weeks away and it can catch up then with a 25 point cut.

More rate cuts after that will be likely as it sees low inflation, a tick up in unemployment and weaker Chinese growth all coming through. It is still on track to cut to 3.5% – in the next few months which should help to support growth and help prick the AUD bubble.