Xmas rate cut almost certain

The Reserve Bank of Australia has left official interest rates unchanged at 4.5 per cent for November but is likely to bring rates down in December.

Given the recent string of bad statistics coming out of the US combined with our own worsening domestic picture, a further rate cut of a quarter to half a percentage point in Australia next month is well and truly on the cards.

We will know more about inflation pressures when wages figures come out later next week but inflation fears appear to have eased after the September quarter CPI figures. And with the election out of the way there seems little to prevent a further rate reduction. The Reserve Bank's quarterly monetary policy statement released on Monday should give some further insight.

The US Federal Reserve has cut rates 0.5 percentage points to 2 per cent because “heightened uncertainty and concerns about a deterioration in business conditions both here and abroad are damping economic activity”. Referring to the impact of the terrorist attacks, the Fed also said “the necessary reallocation of resources to enhance security may restrain advances in productivity for a time”.

The US cut was followed by the Bank of England and the European Central Bank which also cut by half a percentage point amid weakening economic conditions there.

Australia cannot escape the impact of worldwide downturn especially when our domestic performance is starting to wane. The latest unemployment and housing finance figures add to retail trade and building approval figures last week suggesting the mid-year recovery has faded and the economy is weakening.

Another big fall in full-time jobs and an increase in the participation rate has pushed the unemployment rate up to 7.1 per cent, from 6.7 per cent. Although part-time jobs offset the decline in full-time work, the figures reflect a softening job market given the continuing trend of part-time positions being substituted for full-time.

The housing sector has been the key to domestic recovery this year, courtesy of the FHO grant, but the surge of activity looks to be tailing off. Total housing finance approvals fell by 1 per cent in September, following a 2.5 per cent fall in August. Construction finance commitments declined by 3.3 per cent, newly-erected dwelling finance increased by 3.2 per cent while established dwelling finance commitments fell by 0.8 per cent.

US 2- and 3-year bond yields have also moved sharply lower in market trade suggesting there may be more falls to come in home-loan fixed rates.