More analysts see rate cuts

From the SMH blog:

There’s an increasing likelihood that the Reserve Bank will have to cut rates next year, global asset manager AllianceBernstein says.

“The risks for the Australian economy are tilting to the downside, in our view, and, far from increasing interest rates, there’s a growing prospect that the RBA may well need to cut them again,” said AllianceBernstein senior economist Guy Bruten.

Currently, the vast majority of economists is expecting a rise in the cash rate next year. The rationale is that the downturn in resources is being offset by an economic rebalancing in which low interest rates stimulate the housing sector, and that this – helped by further currency weakness – triggers an improvement in non-mining activity and leads to a broader recovery.

But Bruten says this view underestimates the likely impact of the collapse in commodity prices, which is likely to be “deeper and broader” than expected. This is a “mirror image” of the failure to anticipate the strength of the commodity boom when prices were rising.

“It’s important to remember that we are only at the very start of the adjustment of capital spending in the mining sector – the big falls are yet to come. It will be some time yet before the adjustment phase becomes more apparent and is fully recognised,” says Bruten.

The consensus also underestimates the growing risks to the economy from factors which are frustrating the RBA’s attempt to ease the strength of the Australian dollar and boost the economy through low rates.

Bruten said these risks lie in three areas: “massive” uncertainty about how the global monetary policy environment will evolve next year; in China, the continuation of slower growth and policy uncertainty seen during the last 12 to 18 months; and, in Australia, a loss of momentum in the housing sector.