There are early signs emerging that the economic cycle is starting to turn. The improvement in business and consumer confidence, rising asset prices, better financial conditions and promising developments in the global economy are giving economists a greater conviction that economic growth will pick-up next year.
Financial markets are now indicating that the Reserve Bank of Australia (RBA) probably won’t cut the official cash rate below the record 2.5% current level (refer chart below). This indication can be attributed to Chinese economic data which points to a possible revival for the Australian mining industry, as well as Prime Minister-elect Tony Abbott beginning plans to scrap the carbon and mining taxes whilst also planning to build more infrastructure to help encourage renewed investment in the sector.
The risks to this outlook for the RBA are now two-sided – if the Australian Dollar doesn’t fall and rebounds, the RBA could cut again, but if house prices surge, higher cash rates are a possibility.
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