No rate cut in April as HSBC pencils in rate hike towards the end of the year

No rate cut in April as HSBC pencils in rate hike towards the end of the year
No rate cut in April as HSBC pencils in rate hike towards the end of the year

The Reserve Bank is likely to leave the cash rate on hold in April and possibly for many months after that unless the non-mining sectors of the economy fail to pick-up.

Yesterday the RBA left the cash rate unchanged at 3% with bank economists noting that the monetary policy statement which accompanied it was virtually identical to the one made in February, but for a slightly better outlook for non-mining sectors.

Signs of improvement include the 0.9% rise in retail turnover in January – the strongest January rise in six years – and capital city dwelling values rising by 0.3% in February, following a 1.2% rise in January, according to the RP-Data-Rismark index.

Building approvals figures were a bit weaker than expected for January (down 2.4% on a seasonally adjusted basis), but previous figures have been upwardly revised and it is likely that January figures will also be upwardly revised in line with an overall improvement trend.

Quarterly GDP figures released today show the Australian economy grew by 0.6% in the December quarter after a 0.7% increase in the September quarter with CommSec's chief economist Craig James noting Australia's record-breaking economic expansion continues.

"Australia has a Goldilocks economy – not too hot, not too cold, in fact it's just about right. Why our good economic circumstances aren’t trumpeted more, defies rational explanation," writes James.

HSBC chief economist Paul Bloxham says low inflation (currently well within the RBA’s target 2% to 3% band at 2.2%) means an easing bias still remained and the RBA could cut rates if necessary, but he highlighted the following comment by RBA governor Glenn Stevens in the monetary policy statement, which suggests a brighter outlook.

“During 2012, there was a significant easing in monetary policy. Though the full impact of this will still take more time to become apparent, there are signs that the easier conditions are having some of the expected effects.”

Bloxham says the RBA continues to push the message that an easing bias remains in place, which keeps monetary conditions loose and prevents further appreciation in the Australian dollar (helping non-mining sectors like tourism, manufacturing and retail).

“Tactically, it pays the RBA to be dovish, irrespective of whether it eases further, particularly given the global currency wars.

But he also highlights a brighter economic picture emerging despite national accounts figures coming out today that showed a 3.1% rise in GDP over the 2012 calendar – slightly below the RBA’s expectations in the February statement of annual GDP growth of 3.5%.

“Solid [January retail] trade data and a surprise jump in the public investment data suggest there is more upside than downside risk to our forecast," says Bloxham.

Commonwealth Bank chief economist Michael Blythe also notes that the March monetary policy statement is almost a “carbon copy” of the February statement, but for “some faint suggestions that the easing bias is a little less pronounced”.

“Global downside risks have lessened but the qualifier 'for the moment at least' made in February has been dropped.

“Sentiment in financial markets is now 'much improved' rather than just being on an improving trend.

"Views on non?mining capex have shifted from 'relatively subdued' to adding a positive qualifier that 'some prospect of a modest increase' is now in store."

Blythe says this “shift in emphasis” should be judged against the “relatively upbeat commentary provided by RBA Governor Stevens in his parliamentary testimony on 22 February, a lessening of concerns about the size of the mining capex ‘pothole’ and indications that the transition to non?mining led growth is underway”.

"We expect the cash rate to remain at 3% during 2013," he says.

However ANZ economists Ivan Colhoun and Katie Dean maintain that the RBA “retains a clear bias towards further easing if the non-mining economy does not pick up more strongly”.

“We continue to pencil in a further rate cut in June and see very little risk of a rate rise over the next twelve months as some are predicting,” they say.

Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer


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