GDP rise brings rates caution

The Reserve Bank left interest rates on hold for March but the chances that it might act to lift rates at some stage this year rose this week.

The December quarter GDP figures showing that the economy grew a healthy 1 per cent in the last three months of 2006 goes some way to resolving the conflicting set of economic indicators emerging over the past six to nine months.

Low GDP growth figures had been at odds with a booming employment market which saw the country overflowing with new jobs. The Reserve Bank went so far as to say the economy was in better shape than the previous GDP figures suggested and the latest figure only supports that assessment.

Looking forward, RBA assistant governor Malcolm Edey said this week the world economy is motoring along in 2007, courtesy of China and India, with no let up in sight and providing an ongoing boost to growth in Australia.

The RBA's views on where we have been and where we're going only serve to make it more confident about acting with a further interest rate rise this year if it thinks inflationary pressures are getting out of hand again.

So far, this is not the case and an interest rate rise is not likely in the next couple of months. Inflation was receding towards the end of 2006. With the economic growth on the up-tick, however, and no sign of slackening in the resources boom, it may not stay that way.

The January building approvals figures produced the week's sour economic note, confirming that housing construction has sagged in recent months following three interest rate rises last year. Another 1 percentage point fall in total dwelling approvals in January includes a 2.2 per cent fall for houses. This was offset to some degree by a 2.6 per cent rise in the apartments sector as the rental shortage spurs investor activity in real estate.