Rates on hold?
by Peter Switzer
Great news for interest rate worriers – the economy is worse than the Reserve Bank and Treasury economists predicted and so interest rates should remain on hold for longer than expected. And believe it or not, I’m talking to more and more smarties who think the next move might be down!
Still can’t completely jump on board with that, though I would argue it wouldn’t hurt considering the recent run of economic data I have seen on the Aussie economy.
Yesterday we saw retail spending fall 0.6 per cent in May after a 1.2 per cent rise in April. It means retail is up only 1.4 per cent over the year which is less than inflation and this is unusual showing how retailers are doing it tough.
Another sign that the economy is faltering is the latest TD Securities-Melbourne Institute monthly inflation gauge, which came in flat in June after rising by 0.2 per cent in May.
The annual rate of inflation has slipped from 3.3 per cent to 2.9 per cent. And the approximation for the underlying rate of inflation came in at 1.6 per cent, which is down from 1.7 per cent the month before.
Provided the CPI or official inflation figure out late in July corresponds with these readings, the RBA could be on hold for the rest of the year.
And if the economy gets worse, we could see a cut but we will need to see more weakness before the Big Bank admits it was wrong raising interest rates so fast in 2010.
Last week we saw the Sensis Business Index, which showed small business confidence was shot to pieces.
Christena Singh who constructs the survey said the business confidence indicator had fallen dramatically during the most recent quarter.
“This is one of the largest quarterly falls in business confidence we have seen in the 18-year history of the report,” she said. “In a historical context, business confidence is at a low-ebb in Australia. We have really only seen business confidence lower during the peak of the Global Financial Crisis and during the introduction of the GST.”
Given the fact that consumer confidence is also heading south, it would be madness if the RBA raised rates and in fact a rate cut is looking like a good idea.
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Published on: Tuesday, July 05, 2011
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