Rates On Hold Amid Mixed Signals

By Bob Wilson, 3rd July 2012

The Reserve Bank of Australia has left official interest rates on hold in June, amid

mixed economic signals. Most analysts were not surprised by the decision, as the

RBA May meeting minutes indicated the move to cut rates by 0.25% was a line-

ball decision. The cash rate remains at 3.5%, with most banks passing on some

or all of the successive rate cuts in May and June. The RBA Board says inflation is

expected to be within the target and growth close to trend; but with a more subdued

international outlook than was the case a few months ago, the maintenance of

current monetary policy remained appropriate. 

However, job demand is weak and there are conflicting reports about the impact of

rate cuts. The latest RP Data-Rismark home price index showed that home values

in six capital cities rose by 1% or more in June. Analyst Tim Lawless attributes the

improvement to the reduction in interest rates and improving consumer sentiment.

While lower rates benefit those with existing mortgages, they have not yet filtered

through to new home construction, according to a Master Builder Australia member

survey.

“The feedback from the industry is that recent interest rate cuts from the Reserve

Bank have not worked to stimulate new home buyers at this point in time,” Master

Builder Australia chief economist Peter Jones says. The MBA June quarter report

said the non-mining side of the building industry was at risk of sliding into recession

and the introduction of the carbon tax can only makes matter worse. Jones says

building activity was down by 20% in the June quarter and many non-resources

sector builders are in survival mode.

“The Reserve Bank must consider further interest rate cuts and more importantly,

banks need to fully pass cuts onto their customers, including small businesses,” he

says.

However, new data released on Tuesday shows that the number of building

approvals rose 27.3% in May, following a 7.6% fall in April. The Australian Bureau of Statistics says dwelling approvals increased in Victoria (+31.8%), New South Wales (+25.1%), Western Australia (+24.8%), South Australia (+16.2%) and Queensland (+10.3%). The large increase in approvals in May was driven by a large number of private sector projects in NSW, Victoria and the ACT.

While several commentators are forecasting the official cash rate to fall as low as

2.75% by December, RBA governor Glenn Stephens gave the clearest clue to policy

intentions earlier in June.

He told a business gathering that the RBA “cannot neglect the interests of those who

live off the return from their savings and who rightly expect us to preserve the real

value of those savings.”

Inflation is the key driver governing monetary policy and a monthly survey this week

gave an early clue to the consumer price index (CPI), which is due on July 25. The

TD Securities-Melbourne Institute monthly inflation gauge dropped 0.2% in June

after a flat result in May. TD Securities says it is now forecasting underlying inflation

will rise 0.6% for the June quarter, lowering the expected annual rate from 2.1% to

2% (the lowest annual pace for underlying inflation since 1998).

Inflation comes in different sizes, though, depending where you live. A survey by

PRDnationwide shows Darwin outstripped the country as its cost of housing soared

in the five years since the 2006 Census. PRDnationwide’s analysis of Australian

Bureau of Statistics data shows that Darwin’s median weekly rents rose 80% and

monthly mortgage repayments rose 65.7% between 2006 and 2011.

END

Bob Wilson

Bob Wilson is a free-lance journalist with 25 years’ experience in daily newspapers.