Interest rates tipped to remain steady after weak business data

The Reserve Bank of Australia is expected to keep interest rates on hold at 3% after new data from the Australian Bureau of Statistics reveals business conditions were worse than expected in the second quarter.

The data, released yesterday, reveals company gross operating profits declined 7.8% during the second quarter, but profits before income tax also rose 5.4% compared with the previous quarter.

However, the value of stocks held by private businesses dropped 3.4%, while the estimate for wages and salaries dropped 1.1%.

Inventories fell by a seasonally adjusted 3.4% during the quarter, with manufacturing sales of goods and services falling by a seasonally adjusted 1.1%. The seasonally adjusted estimate for wholesale trade’s sales of goods and services rose by 2.9%.

The ABS figures also come after the TD Securities-Melbourne Institute monthly inflation gauge revealed inflation fell to 1.7% in August from 1.9% in July.
The data will likely play a part in the RBA’s meeting later this afternoon, as governor Glenn Stevens said last month in a speech that the current 3% is only an “emergency” measure.

“There will come a time when the exceptional monetary stimulus in place at present will no longer be needed. It will then be appropriate for the board to do what it has done on past such occasions, namely to start adjusting interest rates back towards normal levels,” he said.

The RBA recently lifted its GDP forecast to 0.5% for 2009 and has also dismissed the need for further interest rate cuts, saying “it now appeared unlikely this would be necessary”.

But the disappointing figures could see the interest rate remain at 3% for a while longer.

National Australia Bank and JP Morgan expect the RBA to lift the cash rate by 5 basis points in the December quarter, while Citigroup and ICAP expect a 25 basis point increase. Westpac expects the next rate rise in February next year.