Is there a doctor in the house?

With the Reserve Bank holding fire on interest rates this week, the big question on every homeowner's mind is: when will the RBA cut interest rates?

How low can you go?
The answer is simple: no one knows, as we are in the hands of economic statistics. But let me alert you to the big interest rate issues before hazarding a guess.

While most of us are trained or educated via newspapers to think inflation is the key driver of what the Big Bank does with interest rates, at the moment the big watch is on unemployment or employment levels.

Inflation is the crucial target for those who run interest rates in Australia and the current big fear is that as unemployment has gone so low, the job market is as tight as a drum and could spark a surge in inflation.

In December, employment rose by 44,600 leaving the unemployment rate at a 30-year low of 4.6%. CommSec economist Craig James explains what he thinks is going on and he gives the toughness of John Howard some credit for the outcome.
"It's clear that anyone who wants a job at present can find one. A key factor behind the strength of the job market is demographics, or more specifically the shortage of young people," he told me. "The good news is that the tightening of eligibility for unemployment assistance is driving more people into the workforce and that is helping employers meet their staffing needs."

Steady as she goes
Combine the above information with the latest Seek Employment Index and you have to think that nothing negative is happening on this front. The Reserve Bank has little reason for backing off its bias to raise interest rates.
Even James, who was more bullish on seeing an early rate rise, has backed away a tad. "We have changed our position on interest rates," he reported recently. "A rate cut around mid-year is looking less likely as the strong job market will support moderate economic growth."

But wait there's more.

"Rate hikes are also off the agenda with inflation to fall sharply over the next six months," he added. "We expect interest rates to remain unchanged for the foreseeable future."

So, the mid-year cut I was hoping for, but not strongly expecting, looks less likely. However, I never say never too easily. It could happen, but we would need to see some notable rises in unemployment and these would be a surprise.

The good, the bad and the bananas
To the flipside, and if inflation or economic growth surprises on the high side, the Reserve Bank could raise rates again, but I am not banking on that, to create a weak pun.

There are actually good reasons to cut interest rates. The dollar is high and helps contain inflation; petrol prices have fallen and banana prices are back where they should be. Inflation has fallen from 3.8% to 3.1%.

The ANZ job advertisement series, which predicts the employment outlook, has eased sharply in trend terms over the past three months, but this hasn't shown in unemployment numbers.

Retail sales figures only went up by 0.3% in December, with trend growth the limpest in 13 months. And building approvals fell by 1.9% in December and in trend terms, apartment approvals are at near six year lows.

CommSec says the Performance of Services index was steady at 49.5 in January, however, any reading under 50 suggests the sector is contracting.

Finger on the pulse
All up I am expecting an interest rate cut some time this year, rather than another rise. As I feel the heartbeat of the economy, it is weakening. Any further interest rate rises would be like asking a heart attack victim to run the City to Surf before the operation.

Never fear, Dr Switzer will be monitoring the patient!

Click here to visit Peter Switzer's website