Goldman Sachs: The Australian Economy Needs A Rate Cut But It Won't Get One

Photo: Getty/Matt Cardy

The Australian economy is struggling to make the transition from the mining boom in a reasonable time frame, with only house prices and housing construction really showing any signs of life.

Large swathes of the rest of the economy from retail to manufacturing to consumer sentiment are still struggling and in need of a rate cut.

But the RBA is unable to deliver a rate cut let alone change to an “easing bias” because of the boom in Australian house prices according to Goldman Sachs head of economics Tim Toohey via the SMH.

Like the Reserve Bank, Toohey believes that the Aussie dollar needs to be lower but he highlighted that it’s not just the lower level of the Aussie but that the fall itself needs to be “lower relative to where commodity prices actually are going”.

But he added that it will be some time before the Aussie falls sustainably.

“It’s going to feel like a very, very long time, I think, before that shift in Fed policy can actually give you a breakage in the currency without potentially additional policy easing on the local front.”

Which means that the economy is going to look quite a bit weaker in 2015, making the current concerns over housing less important in restraining the RBA, according to Toohey.

It’s going to come down to the unemployment rate, inflation and, as I say, house prices are more of a second-order concern. Into that March, April period next year, that’s when it’s going to get interesting.

In the end, Toohey reluctantly took out his call for a rate cut recently but he says it was a reluctant move on the back of house prices. Clearly, though, he’s not far away from calling for a rate cut once more.

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