Rates held steady despite inflation signs

The Reserve Bank chose not to lift interest rates at its April meeting this week. A 0.25 per cent hike must have been a close run thing given its stated concerns about inflation and its previous proactive approach to clamping down on inflationary pressures as soon as they appear. Perhaps the RBA board is waiting to see 'the whites of the eyes' with the release of the official inflation data for the first quarter of 2007 before deciding whether to respond with another round of rate action. Tellingly, however, the Melbourne Institute's March inflation gauge this week showed significant price pressures at work in the economy this year. The index rose a sharp 0.5 per cent last month for a measure of the annual rate of inflation at 3.5 per cent. Its underlying measure now stands at 3.3 per cent. If both those measures are anything close to correct, then inflation stands distinctly above the RBA's 2-3 per cent target band. If reflected in the official figures later this month, an interest rate rise would have to be a dead cert in May. While the full impact of last year's rate rises are still working through the system, especially November's, it is already apparent that the consumer sector at least has shrugged them off. Retail sales grew 0.9 per cent seasonally adjusted in February on the back of a strong result in January too. Retail spending growth has been trending upwards over the last year despite hiccups around the time of the three interest rate rises. Sales are likely to be rising from both increases in prices and in the volumes purchased. Even the poor old residential construction sector showed a solid 10.6 per cent increase in building approvals in February. This was due to huge a jump in apartment approvals, with house approvals falling slightly. Supply beginning to react to the rental housing shortage in some capital cities might explain some of the rise, and if so augurs well for activity this year. But such a big jump in apartment approvals is more likely to reflect volatile monthly figures and is unlikely to be repeated in coming months.