Rates on hold – can they stay there?

The Reserve Bank board left official interest rates on hold for September but that's not to say it doesn't stand ready to lift rates later this year should the economy continue to show resilience to previous rate rises in May and August.

Economic releases out this week on GDP, employment, building approvals and housing finance underline that the interest rate outlook hangs in the balance, with not a lot to suggest that inflationary pressures are easing. For once, oil prices are about the only thing falling.

Somewhat confusingly, however, GDP for the June quarter was very sluggish at just 0.3 per cent at a time when employment has been growing strongly and continues to do so. But leaving aside the obvious differences in economic performance between WA and the south eastern states, the GDP figures overall seem to show that national production is down more because of a lack of capacity to produce rather than a lack of demand to buy and borrow.

With the annual rate of economic growth slipping to 1.9 per cent by June, it does suggest that the RBA might have a bit of breathing space. The heat may come out of the jobs market and another rate rise may then be avoided. It also shouldn't be forgotten that the effects of the two earlier rate rises are still flowing through and it's too early to conclude that they have had little effect.

But so far, the jobs market keeps defying gravity with full-time employment growing strongly again in August, up another 23,000 positions. The unemployment rate climbed to 4.9 per cent, but this reflects more than anything the fact that the bumper employment conditions are attracting more and more people back into the workforce.

The insatiable demand for workers means the shortfall in the number of skilled workers is keeping pressure on wages while unprecedented feelings of job security are keeping consumer spending levels up.

It's also seemingly helping the housing market along too. The number of housing finance loans for owner occupied housing grew another 1 per cent in July to continue the upward trend for 2006. The value of these borrowings fell, but that's more to do with soft and falling house prices in many parts of the country. Approvals for new home construction are also on the up, jumping 8.3 per cent in July, led by a surge in apartment construction.