Jury still out on rate rise

A chance of an interest rate rise is still unlikely as we await further indication of the effects of the last increase in May. A swag of economic indicators was released this week but all predates the rise.

Retail sales in April grew by 1.4 per cent or at an annual rate of 7.4 per cent. The jump in retail sales was well above market expectations and was the biggest monthly gain since June last year.

Meanwhile, total credit provided to the private sector rose by 1.3 per cent over April 2006. For the year to April, total credit, which consists of housing, business and personal lending, climbed back to above average levels at 14.1 per cent. Total credit remained at strong levels particularly business investment which grew at 1.9 per cent during the month.

In building approvals, there was a 14.6 per cent drop in the apartments sector, whereas private housing approvals rose 0.3 per cent. After falling in the previous three months, approvals in NSW rose 1.2 per cent but fell 18.4 per cent in Victoria and 9.4 per cent in Queensland. Trend approvals fell in all states compared to a year ago, except Western Australia and South Australia.

Business investment capital expenditure (business capex) figures were also released and showed that this sector is continuing to boom, driven by the mining industry. But signs in the economy indicate that this increase in capex may peak before the year is out, including a contraction in the manufacturing sector.

Business capex rose by 0.6 per cent to $18.6 billion in the three months to March. This took the increase in business investment over the 12 months to March to 29 per cent, the fastest annual growth rate in a decade in spending on new buildings, factories, plant and equipment.

As all these figures predate the May rate increase, the jury is still out on whether a rate rise will happen later this year. It is unlikely the Reserve Bank will lift rates when it meets on Tuesday as it awaits evidence of the effect of its May rate rise.