RBA rates outlook in the balance: Economy roundup

Yesterday’s decision by the Reserve Bank of Australia to not lift interest rates may have been widely expected, but opinions are divided on the rates outlook for the year ahead.

St George Bank head of economic research Steven Milch says yesterday’s statement by RBA Governor Glenn Stevens has done nothing to change his view that the RBA is likely to keep rates on hold for the next 12 months.

“Many in the market were expecting something that sounded the inflation alarm after some strong March numbers, but it was pretty balanced. It suggests to us that they’re pretty sure the economy is slowing, and as it does so, will inflation,” Milch says.

By contrast, BIS Shrapnel chief economist Richard Robinson believes the RBA will move on rates again this year, with a rise likely to come as soon as August.

Robinson believes employment is likely to remain at strong levels, wages will continue to grow and tax cuts in July will lift consumer confidence – and all that means the RBA will have little choice but to lift rates.

“The rise will primarily be a response to the tax cuts in July. They may use another high CPI result as the excuse, but it will really be a kind of shock tactic to make sure the tax cut doesn’t trigger a resurrection in confidence and wage expectations,” Robinson says.

Part of the reason a consensus is yet to emerge on the rates outlook – and why the RBA has such a tough job ahead of it – is the starkly different economic conditions between the resource states of Western Australia and Queensland and the rest of the country.

Economic data released today clearly illustrates that divide. For example, while the Seek employment index shows national job ad numbers for April fell by 1.6% in April, almost all of that decline was in NSW, South Australia and the ACT.

In Western Australia, by contrast, the number of job ads increased by 2.7%, with Queensland close behind on 0.8%.

New hotel occupancy data produced by Deloitte tells a similar story, with Perth topping the likes of Paris and London to rank as the city with the world’s lowest hotel room vacancy rates.

More broadly based bad economic news comes in the form of the The Australian Industry Group – Housing Industry Association Performance of Construction Index for April. The index declined 5.1 points last month to fall to 42.6, moving further below the crucial 50 point line separating expansion from contraction.

“Underlying April’s reduction in total activity was a fall-off in project work on a broad industry front, with firms commenting that subdued market demand had led to increased competition for tenders. Of concern, new orders are now at their lowest level in 20 months, which means that the current weakness in activity is likely to persist during the months ahead,” AIG chief economist Tony Pensabene says.

On the markets today, the S&P/ASX200 has fallen back after early gains to be up just 2.6 points up on yesterday’s close to 5704.0 at 12.25pm.