NAB Business Survey: RBA Needs to Cut Rates in May

Despite a slight improvement in business conditions in the first quarter of 2012, a National Australia Bank (NAB) survey released on Friday said that the data boosts the need for a Reserve Bank of Australia (RBA) overnight cash rate cut in May.

Since the survey results to business conditions remaining below the long-term average and due to thee sideways movement of the Australian economy, a cash rate reduction would help jumpstart the economy, NAB chief economist Alan Oster said.

Mr Oster said the Australian central bank would likely cut the interest rate by 25 basis points to 4 per cent from the current 4.25 per cent.

Mr Oster conceded that part of the improvement in business conditions may be a reflection of the two rate cuts made by the RBA in late 2011, but he stressed that the overall growth to spending because of the lower interest rates appears to have been fairly muted.

He pointed out that although there were minor improvements in business conditions, it was negated by fall in employment conditions. Business confidence went down two points to negative one in the March quarter. A reading below zero is an indicator of worsening confidence. However, business conditions slightly improved to +3 from +2.

The business investment index dipped to +15 points for the March quarter from +19 points in the December quarter. The index is an indicator of business planning for the following year.

"While mining investment plans surged ahead in the quarter, investment plans generally eased outside of mining suggesting that non-mining business investment growth will ease over the year ahead," The Asian Wall Street Journal quoted the report.

"The survey was softer than we expected. It shows the economy is starting to crawl its way back up from the bottom but needs a bit of help.... The divide between the stronger mining and services-based sectors and the weaker consumer and trade dependant sectors remained a marked feature of the economy in early 2012," The Herald Sun quoted Mr Oster.

NAB said the general movements in the global economy appear to keep overall sentiment below average levels and the loss of confidence since the end of 2011 is a reflection, partly, of heightened concern over China's hard land and the continued strong Australian currency.

However, one concern of borrowers is that while the RBA may cut rates in May, Australian lenders - particularly the big 4 which counts NAB - would likely cite increase in wholesale funding costs as justification to increase mortgage rates while the RBA policy is in the opposite direction.