Stronger housing market among factors that will cause the RBA to keep the cash rate on hold next week: HSBC’s Paul Bloxham
The Reserve Bank is likely to leave interest rates on hold at its October monetary policy meeting next week, though it will be a close call, says HSBC Australia chief economist Paul Bloxham.
Bloxham says with inflation low, the RBA has scope to cut rates if it needs to.
“But we don’t think the hurdle has been met for a cut next week.
“We still favour a cut in November, assuming China’s economy does not show definite signs of recovery, and think that the 100 basis points of loosening priced in over the next year is too much," he says.
In his last RBA bulletin before Tuesday’s monetary policy meeting, Bloxham notes that housing prices are lifting, with a “solid rise in prices in September; home auctions in Sydney and Melbourne in recent weeks have seen rising clearance rates, a signal of improving turnover.
“Building approvals for housing are past their trough. Business credit has been growing in recent months, after falling in recent years.”
He has also not been swayed by the likes of Westpac’s Bill Evans, who shifted his view last week from a November rate cut to an October rate cut.
Other economists tipping a rate cut next week include AMP Capital’s Shane Oliver, Stephen Koukoulas from Market Economics, Dominic Bryant from BNP Paribas Asia and ANZ Research.
Bloxham says there are two narratives the RBA board is following that will dictate its decision-making – where the global economy is heading and how previous rate cuts are impacting locally - and says other economists and commentators are over-analysing speeches and statements made by the central bank.
“Reading more into the RBA’s recent individual word choices, or phrasing, is false precision,” says Bloxham.
On the global front, Bloxham says the mid-year rate cuts of 75 basis points in May and June were made to get the RBA “ahead of the game” and that the “more subdued global outlook was needed to justify the current policy stance”.
Further deterioration globally would be necessary for the RBA to contemplate a rate cut.
“Globally, we think things are about the same as they were last month, on balance, from Australia’s perspective. China’s PMI (manufacturing index) was stable, commodity prices bounced back a little and QE3 (the US government bond-buying program) has removed some of the downside risk of a sharper US slowing. European conditions have weakened, but probably no more than expected,” says Bloxham.
Domestically, Bloxham says the RBA narrative has been that “the full effect of the previous cuts is yet to flow through, though they noted tentative signs that monetary policy is supporting the housing market and lifting business credit”.
“Domestic indicators suggest growth has been modest into the third quarter of 2012. Retail sales fell in July, but the RBA told us their liaison suggested sales rose in August.
“Business conditions and confidence tracked broadly sideways into August, and consumer sentiment has been steady. Employment and hours worked eased in August, but the unemployment rate remains low at 5.1%, despite RBA forecasts that it would head towards 5.5% in the second half of 2012.