Rates on hold for Xmas and beyond

Any lingering doubts that interest rates will be on hold into 2005 disappeared in the last week with a string of evidence to suggest the economy has plateaued in recent months and is not on the verge of any inflationary surge. The latest data on economic growth, consumer spending, building approvals, borrowing for housing and house prices all emerged this week to paint a picture of an economy settling back from the robust conditions of 2003-04.

GDP rose only 0.3 per cent in the September quarter and now we are looking at annual economic growth around the 3 per cent mark rather than the 4.5 per cent of some time back. The housing market now seems in the midst of an orderly slowdown while consumers appear to have reined in their spending levels to more sensible levels. Retail trade fell 0.7 per cent in October and adds to a mixed picture over recent months after such prolonged good run of healthy sales until mid 2004.

The decline in building approvals has also continued, another 2.4 per cent drop in October, although it’s the apartment sector dragging down the overall figures with houses holding up. The RBA's October measure of housing credit at 1 per cent keeps home borrowing falling into line more sustainable pattern of growth. House prices fell across Australia for the first time in four years during the September quarter. The 0.7 per cent overall decline reflected bigger drops in the key eastern capitals while Perth, Adelaide and Canberra saw rises.

So the big domestic driver of the economy in recent years, housing, has done its dash for the moment while the under performer, exports, is yet to rebound to offset this. Some have already started talking about the next move in rates being down but this is premature.

Whether it was the election campaign or other factors, there was evidence of sluggishness in the economy during the quarter when employment and retail spending slipped. Remember that the latest GDP figure reflects what was happening three months ago and more, and that economic data out since suggests there might have been a temporary lull that we are now climbing out of – the strong employment figures primarily. There also seems no sign that consumer confidence has fallen from its historically high levels.

While it remains to be seen just how strong or otherwise the economy is as we head into 2005, the Reserve Bank will likely be content to sit on its hands in December and leave rates steady – and probably on into the first few months of the new year.

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