The RBA backs a winner

If you catch wind of a Melbourne Cup tip from a Reserve Bank board member you might be wise to act on it.

Despite a healthy retail sales result, the RBA board received all the economic news over the last week it needs to feel entirely comfortable with leaving official interest rates on hold on Cup day and with its backing of a rates-on-hold line in recent months.

A 19 per cent fall in housing approvals in September goes a long way to unwinding the previous month’s shock 23 per cent rise and signals the housing boom may be coming to an end as had been hoped. This eases somewhat the RBA’s dilemma over whether to raise rates to cool the overheated housing market or keep them down to help insulate the wider economy from the parlous economic and political climate internationally.

Its bet on the latter course of action is starting to look like a winner in light of news US consumer confidence has fallen to its lowest level in nine years. A very worrying development given American consumers’ willingness to keep spending over the last two years has been a saving grace of their recessed economy. Now all the talk is of more rate cuts in the US.

Continuing Australian retail strength underlined by a solid 0.7 per cent rise in retail sales in September will not be enough to sway the RBA towards a rate rise. Especially when you consider the effects of worsening drought which now appear certain to retard economic growth significantly over the rest of the financial year.

Interest rates to stay steady until February at least.