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Interest rate cut tipped

By Scott Murdoch

January 30, 2007 12:00am
Article from: The Australian

PROSPECTS for an interest rate cut by the end of the year are firming, as economists predict the Reserve Bank will shed its strong tightening bias.

ANZ has tipped that the next move in official rates would be down instead of up.

ANZ believes the RBA's decisions this year will hinge on whether the effects of low inflation spread across the economy. The prediction has been backed by Access Economics, which has forecast the rise in output and slowing domestic demand will reduce the need for another rise.

In a publication out today, Acess says the drought will also feature in monetary policy deliberations.

ANZ chief economist Saul Eslake told a briefing of banking analysts yesterday that the interest rate cycle might have hit the top after three rises last year.

"There should be increased signs of higher rates impacting domestic spending over the next few months," he said.

"So, provided the Government avoids the pre-election splurge, this will likely represent the peak in rates for this cycle."

Access said price pressures should be flattened by the demand and output factors without affecting the economy.

"It may mean that the Reserve Bank is able to take its foot off the brake, perhaps by late 2007 or early 2008."

The RBA meets next week but is almost certain to keep rates on hold. Economists will analyse the RBA's next statement, due on February 12, for signs of a dovish tone.

ANZ has also reassessed the effect the drought could have on the Australian economy.

The long dry, judged the worst on record, has been estimated by the Australian Bureau of Agricultural and Resource Economics, to shave 0.75 per cent from GDP this financial year.

But ANZ said rain would turn the performance of the farm sector around.

A return to normal seasonal conditions would herald a 40 per cent swing to positive gross farm product. This result would reverse last year's contraction.

Similarly, if the drought broke, up to 0.7 per cent more could be contributed by agriculture to GDP growth.

The Access research said the drought would prove temporary and mining exports would remain the driver of the economy.

"Once we rebound from drought in the second half of 2007, most sectors should be looking solid," it said.

Mr Eslake said the fundamentals for the global economy remained strong, with growth around 4 per cent. ANZ has tipped this will edge up to 4.5 per cent and represent the longest sustained period of growth since 1968.