Rates remain on hold but inflationary risks loom

The official interest rate has remained at 4.75% for the fifth consecutive month, but economists say the Reserve Bank may soon send rates higher in a bid to curb inflation.

While the rising Australian dollar has eased imported inflationary pressures, it has put pressure on sectors such as manufacturing and tourism.

However, the resources boom – fuelled by Asia’s appetite for iron ore – has bolstered the Australian economy and pushed the terms of trade to historic highs, creating inflationary risks.

Before the RBA’s announcement, ANZ chief executive Mike Smith warned further increases in official rates by the central bank could stall the economy.

The decision to keep rates on hold comes just a week after first quarter consumer prices rose at their fastest quarterly pace in five years.

“There is a lot of heat in the resources side of the economy, but consumers and households are doing it tougher,” Smith said.

Meanwhile, NAB’s latest SME Business Survey shows business confidence rose in the March quarter as the worst of the flood impacts receded.

The report, based on a survey of more than 600 SMEs, shows business confidence levels among SMEs are now more in line with larger businesses.

Confidence has improved in property, wholesale, transport and utilities, and manufacturing, while construction and health recorded a decline.

“With the exception of health, confidence levels are now positive across all industries, and are strongest in property, and transport and utilities,” the report says.

“Confidence levels increased across all major states. Confidence remained strongest in WA and Victoria, and was positive across the remaining states.”

Confidence improved the most for those businesses with turnover between $2-3 million, and mid-tier firms with revenue between $3-5 million.

But while business confidence is high, weakness in SME business conditions was reflected in relatively soft cashflows.

Cashflow deteriorated in construction, transport and utilities, finance and manufacturing, but improved in property and accommodation.

All major states recorded an improvement in cash flow, with the exception of South Australia where it improved solidly.

According to the report, employers identify borrowing costs, declining demand, sourcing suitable labour, taxation/government policy and cashflow as the most significant issues in making long-term decisions.

But another new report – compiled by the Commonwealth Bank and the Australian Chamber of Commerce and Industry – contradicts NAB’s findings, showing business confidence and conditions weakened further over the March quarter.

Based on a survey of 2,957 businesses, the report reveals small firms continue to experience the weakest performance compared to medium and large businesses, with conditions and employment remaining contractionary for small firms over the March quarter.