Tuesday, July 1, 2008

No rate rise required

It’s the first day of the new Financial Year – a good day for the Reserve Bank of Australia (RBA) to meet and decide whether home owners with a mortgage will be spared more financial pain by keeping interest rates on hold.

Yesterday, the last day of the fiscal 2008, the RBA released figures that show the property market cooling and momentum in business credit is starting to weaken. Quoted in the Sydney Morning Herald, the figures indicate the property market is experiencing the slowest growth in 17 years, and business investment, while rising in the month by 0.6%, has hit the lowest level in a year on an annualised basis.

In December last year, business investment was powering ahead at 23.8%. It was, essentially, a major propellant for the economy. The list of major investment projects underway at the moment is impressive, but experts believe the number of new developments will start to slow.
The combination of higher interest rates, the blowout in funding costs and weaker business and consumer sentiment will hold back the commissioning of new projects. Business investment in new capacity, particularly last year, was the new driver of the Australian economy. Now, perhaps, that won't be the case going forward.It is a similar story with the housing market. The rate of borrowing to buy property has slipped to the lowest level since September 1991, spelling gloom for the market.

The Reserve Bank does not need to move interest rates today or indeed, for the rest of the year
Add to this the increasing price of oil is likely to feed into the cost of other goods, pushing up prices and therefore inflation. However, it will also have a dampening effect on discretionary spending as consumers adjust their budgets to find the extra dollars required to fund their largely inelastic demand for fuel - meaning interest rates wont necessarily be the only thing constraining demand.

The potential for inflation in the current circumstances will not be due to excesses in demand. The RBA has the time to examine how the current slowdown in construction and business investment will play out does not need to move interest rates today or indeed, for the rest of the year.

No comments: