Rates left on hold – for now

Official interest rates were left steady at 5.25 per cent by the Reserve Bank at its March monetary policy meeting. But strong consumer borrowing levels and buoyant economic conditions here and abroad mean rates are still expected to rise soon. This probability was underlined immediately following the RBA announcement with the release of strong economic growth figures and a plunge in the Aussie dollar.

The 1.4 per cent growth in Australia's GDP in the December quarter follows a strong September result and means the economy was growing at an annualised rate of 5 per cent in the last half of 2003. This is on the back of strong consumer spending, housing construction and business investment and its unlikely that the half percentage point rise in official interest rates so far is going to be enough to rein in the economy to more sustainable growth. Especially as the world economy continues to pick up, turning from a drag on our economy to a stimulus. At the same time, the fall in the dollar on the back of a substantial rally in the US greenback reduces the anti-inflationary impact on imports and gives a boost to exporters.

Lending weight to the RBA's decision to hold rates steady, however, was another fall in building approvals which fell 3.3 per cent in January to be 12.3 per cent off their peak of last September. Four months in a row of falls suggests the housing construction boom is over. But the picture is a little different in the wider market for established housing where price growth was its strongest for 14 years in the December quarter. Loans for refinancing remain strong and underpin continuing strength in consumer borrowing. At this stage, a 0.25 per cent interest rate rise in April is a fair bet.