RBA breather likely to be a short one

The Reserve Bank left official interest rates on hold at 5.25 per cent at its February board meeting. This leaves the standard variable home loan rate at 7.07 per cent. It is almost certain, however, that rates will be lifted again in the near future – quite possibly another 0.25 percentage points next month.

We will know more about the Reserve Bank's current thinking on Monday when its first quarterly monetary policy statement for 2004 is released. But it is likely that the RBA board felt comfortable in holding back this month on its declared intention of raising rates back to neutral levels. Low inflation, mainly from the rapid rise in the Aussie dollar last year, offers some breathing space at a time when it is looking to discern the impact of the first two rate hikes.

Currently under test is the widely-held theory that interest rates don't have to be lifted as much as they have been in the past to rein in the recent boom levels of consumer borrowing and spending, especially for housing.

The economic data out this week lend support to the RBA's wait-and-see approach with retail trade falling 0.6 per cent in January seasonally-adjusted. This is the first fall for some time after a long run of strong monthly growth readings of 1 per cent plus. The fall may just be an overdue pullback from the highs of previous months.

Total building approvals fell 1.5 per cent in December while those for private houses fell 0.5 per cent. This is the second month in a row of falls and suggests housing construction is coming off its highs. The new CBA/AIG index measuring the performance of the services sector showed an easing in business activity in January, which could reflect an early impact from the first two rate rises. Again, however, not much can be made of one month's figures and at this stage the trend remains firm.

But the downward tick of these all-important indicators won't be enough to stop the RBA from raising rates. Spending and borrowing levels, while off their highpoints of last year, remain at very strong levels and with rates still low and stimulatory there is the danger that the consumer sector could rebound if expectations grew that the interest rate tightening phase was over. At this stage, another 0.25 percentage points at least is in the pipeline.