RBA implies no rate rise for October

The Reserve Bank is set to ignore a big bounce in household spending in the June quarter and keep rates on hold in October. The RBA believes the subdued use of credit provides a truer picture of consumer appetites than the quarterly GDP figures which showed a 1.6 per cent jump in consumer spending — equivalent to an annual growth rate of 6.6 per cent, while household savings fell from 3.4 per cent to just 1.5 per cent. But there were a number of implausible aspects to these numbers. The Reserve Bank prefers more direct measures to the national accounts. In the June quarter there was nothing happening with credit card balances or personal debt.

Reserve Bank assistant governor Philip Lowe said "Despite the considerable optimism about the future, household spending has been relatively restrained over the past couple of years and the appetite for debt has declined. Partly as a result, the pace of household borrowing has slowed significantly," Lowe says. The RBA retains its devout faith in the resources boom and its public forecasts. These show growth at an above-trend 3.75 per cent by late next year and inflation rising to the top of the bank's 3 per cent band by 2012 and imply that rates will have to rise next year.

These forecasts are premised on consumer restraint continuing, with the RBA determined to impose it if consumers show signs of letting go. Lowe says the economy cannot manage both the resources boom and rapid growth in consumer spending. "Given that there is currently a relatively limited amount of spare capacity in the economy, the risk of upwards pressure on inflation would be increased if investment and consumption were both to increase very strongly over the next few years."

Source: The Australian

Advertisement