Rates expected to remain on hold as forecaster says construction sector outlook is solid

Economists are expecting the Reserve Bank to keep interest rates on hold at 4.75% when it meets today, thanks to the relatively benign inflation outlook and concerns about how the economy will recover from the floods and cyclone.

While the floods and cyclone in Queensland are expected to push food prices higher in the short-term, and petrol prices are also climbing due to tensions in the Middle East, the RBA is expected to look past these temporary issues when considering the inflation outlook.

“There is not a lot that the Reserve Bank can do about changes at the petrol bowser or the floods in Queensland,” CommSec chief economist Craig James says.

“If underlying inflationary pressures remain contained, then the Reserve Bank can stay on the sidelines until well into 2011.”

The TD Securities-Melbourne Institute inflation gauge released yesterday reinforced this. It rose just 0.2% in February, after a 0.4% rise in January.

Annette Beacher, head of Asia-Pacific research at TD Securities, expects the RBA to keep its finger off the rates trigger until at least the second half of 2011.

“We expect the Bank to signal that it can comfortably remain on the sidelines for several months. However, it is the outlook for inflation that remains key for monetary policy deliberations, and we remain of the view that inflation pressures are set to accelerate into 2012.”

The stable rates outlook will be welcomed by many sectors, but few more than the construction sector. The residential construction sector has been particularly hit hard by credit shortages for the past two years and is only starting to recover.

While government-funded construction projects have helped underpin the sector in recent years (public construction spending has climbed 50% in the past two years) this is now starting to wind down.

Private sector constriction projects are on the rise, according to forecasting agency BIS Shrapnel, but there is question as to whether there will be a gap between public and private.

“With private sector commercial and industrial building slaughtered by the lack of funding throughout the GFC, and still weak, total non-residential building has fallen sharply over the last six months,” BIS economist Frank Gelber says .

“The government sector has further to fall and the real issue is how quickly a recovery in private investment comes through to take its place.”

BIS is tipping solid but not spectacular growth.

Growth in total construction is expected to be 4% over the next three years, with private sector construction (largely resources-related and residential) increasing by 4% in 2011 and 10% over the following two years.

However, public sector construction will grow by just 2% in 2011 and then fall by 20% over the next two years.

“The private sector is coming through, boosted initially by resources-related investment and later by commercial and industrial building, offsetting the fall in public construction,” Gelber says.

“Sector by sector it won’t be gentle, but again, the outlook for total construction is solid rather than spectacular.”