Rates remain on hold as business conditions hit 13-year low

Interest rates have remained on hold for yet another month, the Reserve Bank announced yesterday, but the lengthy hold-off appears to be contributing to the pressures faced by business.

At yesterday’s meeting, the Reserve Bank board decided to leave the cash rate unchanged at 4.75% due to “the pace of slowed growth in the June quarter”.

“The supply chain disruptions from the Japanese earthquake, and the dampening effects of high commodity prices on income and spending in major countries, have both contributed to the slowing,” RBA Governor Glenn Stevens said in a statement.

“The banking and sovereign debt problems in Europe have also added to uncertainty and volatility in financial markets over recent months.”

Stevens said the key question that needs to be answered is whether the moderate pace of growth will continue, highlighting the extent of the two-speed economy.

“Australia’s terms of trade are now at very high levels and national income has been growing strongly, though conditions vary significantly across industries,” Stevens said.

“Investment in the resources sector is picking up strongly in response to high levels of commodity prices and the outlook remains very positive. A number of service sectors are also expanding at a solid pace.”

“In other areas, cautious behaviour by households, and the high level of the exchange rate, are having a noticeable dampening effect.”

Stevens suggests employment growth is likely to continue in the near-term, claiming skills shortages are largely contained within the resources sector and related industries.

Meanwhile, the RBA believes year-ended CPI inflation is likely to remain elevated in the near-term due to the natural disasters earlier in the year.

However, as the temporary price shocks dissipate, CPI inflation is expected to be close to target over the next 12 months.

Some economists say there’s a chance the RBA could order a 25-basis-point increase to rates at next month’s meeting in order to combat inflation, but the RBA is giving nothing away.

According to CommSec chief economist Craig James, the Reserve Bank has discovered its “dovish” side, acknowledging the weaker outlook for the economy and inflation.

“For the past 14 months, consumers and businesses have been on tenterhooks, bracing for the Reserve Bank to lift interest rates. But the Reserve Bank Board has seen fit to lift rates only once in that 14-month period,” James says.

“Previously, we envisaged that rates could rise twice over the second half of the year, but now we are only penciling in one move over the next five months.”

The RBA’s announcement comes on the back of a survey by the Australian Chamber of Commerce and Industry, which reveals the prospect of rising interest rates is hurting business confidence.

ACCI’s July 2011 Survey of Investor Confidence is based on the responses of 803 representatives from all major sectors. The survey reveals all actual and expected business indicators fell over the June quarter, except the expected wages growth index.

Greg Evans, ACCI director of economics and industry policy, says actual business conditions fell to levels not seen since the survey began in 1998, while many of the expectation indicators declined to their lowest levels since June 2009.

“In the current weak trading environment, businesses continue to face the presence of high interest rates, an appreciating dollar and soft consumer demand,” Evans says,

“More exposed businesses will find it increasingly difficult to cope with further cost imposts including the proposed carbon tax and the prospect of rising interest rates.”

With regard to interest rates, it doesn’t look like businesses will receive any certainty anytime soon, with some economists saying rates could remain on hold until next year.

Ivan Colhoun, head of Australian economics and property research at ANZ, says the bank doesn’t anticipate rate rises before February, while Westpac senior economist Matthew Hassan says his bank expects the next rate hike to come in the December quarter.