Interest rate cut 'won't spur investment'

Thursday 04 Dec 2014

Business investment is unlikely to pick up even if the Reserve Bank is forced to slice interest rates to fresh lows in 2015, Credit Suisse says.

The global financial services company predicts the RBA will cut the current cash rate by 50 basis points to two per cent next year.

Equity strategist Hasan Tevfik says local interest rates are likely to be cut as the US raised its rates, which would weaken the Australian dollar.

But if the weaker currency fails to revive the economy, the RBA could be forced to cut the cash rate to 1.5 per cent.

A deeper rate cut would also signify more serious concerns with the economy.

"Fifty basis points is good, 100 basis points is bad," Mr Tevfik said.

"If you do 50, it's much more about sluggish, sub-trend GDP growth and a moderately rising unemployment rate and weaker inflation."

The prediction comes a day after official figures showed Australia's economic growth weakening to the slowest pace in three-and-a-half years, disappointing financial markets.

The economy expanded by just 0.3 per cent during the September quarter, which translated into an annual expansion of 2.7 per cent.

An economic slowdown was likely to see companies, including the miners reeling from falling commodity prices, cut back on capital expenditure to appease shareholders, Mr Tevfik said.

"Shareholders are more powerful than the RBA when they're dictating what a company should do," he said.

"Shareholders in Australia just terrify companies. Because shareholders don't want capex we're not going to have it."

Regardless of what interest rates do, Mr Tevfik expects companies to take advantage of lower borrowing costs on debt markets.

This would make capital raisings from shareholders less likely.

 

 

 

http://finance.ninemsn.com.au/newsbusiness/aap/8936064/interest-rate-cut-wont-spur-investment

- AAP