Rate cut prospect firms on new housing fall: Economy roundup

The likelihood that the Reserve Bank of Australia will decide to cut the official cash rate next week has lifted with the release of data showing a big fall in new housing sales.

The likelihood that the Reserve Bank of Australia will decide to cut the official cash rate next week has lifted with the release of data showing a big fall in new housing sales.

The market consensus is that the RBA will cut interest rates by at least 0.25% when it meets on Tuesday, but the view was shaken somewhat by yesterday’s strong private capital expenditure results.

Investment in plant, equipment and buildings by businesses increased 5.7% in July, double the rate expected by the market, putting a new complexion on the accepted view that the economy has slowed dramatically.

“What this confirms is that the RBA will be taking a very measured approach to easing policy. A cut of 25 basis points looks a done deal next week, but further rate cuts from there have just become a whole lot less certain,” ANZ senior economist Katie Dean said yesterday.

But the release of Housing Industry Association data this morning showed that the number of new homes sold in July fell by a big 7.2%.

“New home sales fell by 24.5% in Western Australia, 11.7% in New South Wales, 11.2% South Australia, and 7.2% in Victoria. Queensland was the only state to experience a rise in sales, increasing by 13.4%.”

HIA chief economist Harley Dale says the result highlights the need for the RBA to cut rates.

“Budgeted sales levels are well down on expectations and that runs the clear risk of the next step being a shedding of labour in the industry,” Dale says. “The imminent move to lower interest rates is a welcome first step to a much needed home building recovery.”

On the results front, retailer Harvey Norman joined the ranks of retailers who have suffered a fall in the slower economic conditions, with net profits for the 2007-08 financial year down 12% to $358.45 million for the 2008 financial year.

But that result looks positively top rate compared to Allco Finance’s disastrous profit announcement today. The troubled financial services firm revealed a whopping $1.73 billion net loss for 2007-08, an incredible 981% drop on last year.

Retailers with a value for money market pitch have continued their strong run, however, with discount car-part retailer Super Cheap Auto achieving a 15.5% rise in 2007-08 net profits to $25.8 million.

On the markets today, the S&P/ASX200 is up 1.4% on yesterday’s close to 5137.8 at 12.20pm and the Australian dollar is trading at US86.49c.