RBA likely to keep rates steady

There have been mixed signals on the economic front over the last week ahead of next week's monthly Reserve Bank board meeting. But on balance the evidence supports a continuation of the RBA's current policy to keep interest rates steady in June.

April rises in retail trade (1 per cent) and building approvals (0.9 per cent) continue the recent trend of indicators suggesting that the economy is turning for the better. However, a 2.1 per cent drop in business investment for the March quarter underlines a key weakness holding back recovery.

It seems the contruction industry continues a hesitant uplift while consumer spending defies gravity and has held up remarkably well now for five months in a row. The health of these two sectors is vital to overall economic health and are pointing in the right direction.

The business investment result is disappointing but relates back to the March quarter when confidence was at its lowest and before official rate cuts had had much effect.

In fact, those three rate cuts are still working through the economy and won't have their impact for some time and with the economy's hesitant recovery signs the RBA will likely feel any further rate reductions at present unwarranted.

Fixed rates
After last week's flurry of rises in fixed home loan rates, this week has been quiet for market-set interest rates. There have been no moves on home lending rates.

Term deposit rates have seen a little movement – Westpac has lifted short term deposit rates, the Commonwealth has lifted rates across the board but are really only matching earlier rises from the other banks. Westpac's 6-month rate for $20,000, interest on maturity, is 4.25 per cent while CBA's is 3.65 per cent.

Margin loan rates for investors have not yet lifted but changes in bond rates mean shorter term rates of 3, 6 and 9 month terms will likely be facing upward pressure in coming weeks and months. However, 12-month interest in advance loan rates are subject to much competition currently as the end of the tax year approaches so no rises should be expected.