A close call as housing market pauses, but RBA likely to hold cash rate next week: HSBC’s Paul Bloxham

It will be a close call, but the Reserve Bank will leave the cash rate on hold at its May 7 monetary policy meeting on Tuesday, says HSBC Australia and New Zealand chief economist Paul Bloxham.

Bloxham says inflation is low enough for the RBA to consider a rate cut: but at the same time “demand is lifting, albeit modestly”.

“This month confirmed that inflation is low, which means the RBA has room to cut rates further. But interest rates are already low and are gaining some traction, so they may not feel they need to,” writes Bloxham in his latest RBA Observer report.

“This is why we expect them to leave rates on hold next week.

“But it’s a close call. Local and global data have softened in the past month. This will leave the RBA asking whether they have delivered enough stimulus, or, if more is needed?”

Bloxham notes yesterday’s disappointing March building approvals data, where approvals fell 5.5% in seasonally-adjusted terms and 1.2% in less volatile trend terms, led by falls in NSW and Victoria.

“Locally, the sectors that were responding to lower interest rates took a bit of a pause in the past month.

“Building approvals fell and housing prices and consumer sentiment eased back a bit. They are still well above their troughs, but are not racing away.

“The labour market also remains loose. Despite concerns about global commodity prices, Australia’s commodity price index remains at high levels with iron ore prices holding up well.

“We think they will hold steady next week and wait for further evidence that low rates are gaining traction. But, of course, with inflation low, there is always a risk that they cut,” he says.

Bloxham expects the cash rate to remain on hold over the remainder of the year, with a hike “pencilled in for early 2014”.

Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

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